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Cognizant Technology Solutions Corp (CTSH -0.57%)
Q2Â 2019 Earnings Call
Jul 31, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter Earnings Conference Call.[Operator Instructions]
I would now like to turn the conference over to Katie Royce Global Head of Investor Relations at Cognizant. Please go ahead.
Katie Royce -- Global Head of Investor Relations
Thank you, Jeremy and good afternoon everyone. By now you should have received a copy of the earnings release for the Company's Second Quarter 2019 results. If you have not, a copy is available on our website cognizant.com. The speakers we have on today's call are Brian Humphries, Chief Executive Officer and Karen McLoughlin, Chief Financial Officer.
Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures where appropriate to the corresponding GAAP measures, can be found in the Company's earnings release and other filings with the SEC.
With that, I'd now like to turn the call over to Brian Humphries. Please go ahead, Brian.
Brian Humphries -- Chief Executive Officer & Directo
Thank you, Katie, and good afternoon everybody and thanks for joining. Earlier today we announced results for our second quarter. Q2 revenue grew 4.7% year-over-year and constant currency to 4.14 billion and non-GAAP EPS was $0.94. While we are pleased that we met our revenue and margin guidance, we are not satisfied with this level of performance. Our second quarter results do not reflect where Cognizant is capable of achieving in this market environment, neither on revenue growth nor margin rate. What we said about correcting these trends, I'm convinced that a large part of what we need to do is in our own control. Softness in banking and financial Services which was up 1.7% year-over-year in constant currency and healthcare which was down 1.5% in constant currency impacted second quarter revenue growth. While certain market dynamics have impacted our results. I believe that much of our weakness in banking and in the non-life sciences portion of healthcare is attributable to Cognizant specific issues.
By interacting with clients in both industries underline that they are committed to investing in innovation to help increase their competitiveness and growth. Specific to our banking practice we've recently implemented a new operating model which includes a team solely focused on new locus. The team dedicated to the platinum accounts which are a subset of our largest global clients and the banking practice and solutions team to ensure we develop more compelling thought leadership and better align the key partners.
In Healthcare, factors such as an in-sourcing at a large healthcare payer clients and the spending pullback by clients that are in the midst of merger integration impacted our performance in the quarter. Fundamental market changes reshaping healthcare requiring our clients to do more with less and get ahead of regulatory compliance and complexity while dealing with cyber threats and privacy concerns.
We have a market leading position in healthcare and a position of considerable strength upon which to build. I believe industry specialization will be more important than ever with the shift to digital and hence expect to be spending a great deal of time with our healthcare business in clients to ensure we turn around this prized asset.
Over the past three months, we've changed that the leaders of both banking and healthcare to get a fresh perspective, new energy and even greater customer focus. On a positive note, we delivered double-digit growth in products and resources and in communications media and technology and continue to be pleased with our momentum in international markets, our global growth markets region which encompasses our non-North America operations surpassed the $1 billion run rate for the first time in our history. We intend to invest in our international business which should continue to be a growth driver for Cognizant.
Later in the call Karen turn who will take you through the details of the quarter including segment commentary. As you know, I assume the role of CEO in April 1st. Since then, I have significantly deepen my knowledge of the company was reviewing the market opportunity, structure and competitive dynamics. Over the last 18 weeks I've met with more than 100 clients and partners across three continents and conducted over 60 deep dive strategic and operational reviews of the Company. I've actively solicit declined input on our strategy and the strength of our commercial and delivery teams.
I've also spend a great deal of time considering customer needs and buying behavior, our brand position, our business strategy, the effectiveness of our organizational structure, our operating discipline, our portfolio of solutions and indeed our talent and culture. It is clear to me that Cognizant has a proud heritage significant customer loyalty, a broad portfolio of offerings and engaged and talented associates throughout the world. However, we can position ourselves better to participate in the market opportunity and this work includes refining our strategic posture and associated enablers to ensure we better participate in the categories that are most relevant to our clients' needs developing greater thought leadership and an innovation agenda by industry vertical accelerating investments in revenue growth including increased sales and marketing, targeted innovation and enhanced partnerships. Significantly lowering our cost structure to facilitate these investments in growth and to ensure we are more cost competitive in deals and ensuring greater operational discipline and a more performance-based culture to make certain, we execute with rigor and focus.
Our path to accelerated growth starts with customers, the lifeblood of every company. It's important that we ready ourselves to address the pricing demands of customers in our traditional areas of strength while readying ourselves also for the changing dynamics in digital. Given advances in technology, customers regardless of their industry verticals are faced with an unprecedented pace of change in risk of disruption. Against this backdrop, they are focused on modernizing their environments, extracting value from data, better understanding their own customers and accelerating innovation in cloud migration to increase their competitiveness, security and agility.
As investments are shifted to digital, budgets in the legacy pressured with increased focus on cost reduction during renewals. Given our traditional business mix, Cognizant has been exposed to this headwinds. We partially offset this peer through mid management automation and other delivery efficiency levers. In addition, given our strong customer NPS, we have often been able to provide incremental savings to clients by consolidating to work of other vendor, while these strategies may be affected in the short term, we need to significantly accelerate our shift to digital as we consider our intermediate and longer-term future.
The pivot to digital requires us to rethink many aspects of our company, including our brands, skills, processes, systems and tools, client engagements will become more project oriented, meaning more contracts with lower TCV, our account teams will need to build relationships with a broader C-suite as budget owners, decision makers and influencers extend well beyond the CIO. We will need more consultative selling skills, more digital talent, more targeted sales compensation programs and more intellectual property and thought leadership aligned by industry vertical.
Delivery will be increasing the agile with near and onshore delivery complementing offshore centers. The skills of our associates and our leadership team must further evolve. This is a multi-year transition that is essential to our future. Against this backdrop, customers are choosing their strategic partners. So as we more readily embrace digital, we must ensure our client facing resources under branding represent our strategic ambition.
Meanwhile, we need to be even more deliberate and our solution portfolio which includes increasing our investments in areas that provide the greatest value to clients while generating the best return for Cognizant. This requires a rigorous capital framework to accelerate our position in emerging categories while reducing our cost structure mature and declining categories.
We have a strong foundation to build from in some of the growth categories. One such example and one I am extremely excited about is digital engineering, this is a large attractive market with 20% plus growth rates. To accelerate our position in this market, we've recently decided to combine Cognizant's digital engineering capabilities with Cognizant Softvision. Until now, our assets have been distributed across Cognizant and our structure and operating model, have been fragmented and inconsistent. This combined practice with over 11,000 associates and revenue of approximately 800 million will provide a powerful combination of software, product development and application modernization services to clients across the globe. I believe that our focus efforts will ensure greater brand recognition in this important category and allow us to do more meaningfully participate in the market opportunity. Our increased focus on digital engineering reflects the market opportunity before us and the growing needs from our clients to achieve top line growth, improve customer engagement through superior experience and boost productivity at an accelerated pace.
With this combined practice, we will bring together current and emerging technologies scale cross-functional teams and innovate talent and delivery methods into a single product-centric operating model. We are building the digital culture into operating model that influences how our clients can see, design, engineer and ship digital products at speed. At the same time, we are leveraging decades of experience and expertise in a client's technology stack to produce a cloud ready architecture. We will finalize our strategic positioning in the coming weeks however as we enable our customers to disrupt and innovate via modern scalable, agile, data enabled and future proof architectures, it is clear that we should further accelerate our investments in digital engineering cloud and IoT. And we must strengthen our partnerships with industry leaders to buttress our own capabilities. That being said this is not a strategic overhaul with rather refinement of the strategic positioning, our capital allocation and the enablers critical to execute our strategy.
Against this strategic backdrop, we need to determine the necessary steps to be taken to unlock Cognizant's growth potential. For this reason, we have established a transformation office which is charged with reviewing six areas of focus as follows. Strategic choices which include where we want to make strategic bets to better expose us to growth categories. organizational structure, which includes our operating model, our metrics and roles and responsibilities within this. Talent, which includes attracting, developing and retaining talent, our culture, our compensation of structures and our skills. Delivery transformation which includes optimizing our unit cost of delivery across the global delivery model. Sales force transformation which includes compensation plans, customer segmentation, increased partnerships, sales coverage ratios and consultative selling. And finally team for growth which aims to ensure we have the cost structure, processes and tools to facilitate growth. Each work stream is led by a member of our executive committee which is cross-functional in nature and is said against a comprehensive change management and communications framework.
We've made significant progress in a short period of time. I'm personally excited about the findings of the transformation office which underlines to me that we can meaningfully change our competitiveness in this market. We've identified opportunities to sharpen our strategic focus, simplify the organization, clarify roles and responsibilities, empower our teams closer to the customer and free up investments in growth by significantly reducing our cost structure. We have more work to do in the weeks ahead, including internal change management and communications to maximize associate engagement. We expect to outline the details of this program including the execution plan and associated restructuring charges on the third quarter earnings call.
Happy customers be the first line of the income statement. So as we aim to accelerate our revenue growth, I want to lead by example by striving to be in front of customers every single day. I've asked for greater innovation and growth focus from our executives and so I've made some changes in the leadership team. Both external hires and indeed internal promotions. Meanwhile to ensure our senior leaders get closer to our customers and our front-line operations we've initiated a process to optimize our spans and layers. This has the added benefit of speeding up decision making improving communication and reducing cost. Growth also requires investments in sales coverage targeted M&A and a competitive cost structure. Therefore even ahead of the execution of the conclusions of the transformation office, we have moved on a number of things including the acquisition of Zenith Technologies which expands Cognizant's IoT portfolio and extends our life sciences domain expertise by enabling us to become a single source provider of end to end smart factory capabilities a key growth driver in Industry 4.0.
The separation of digital systems and technology one of our three service lines from our delivery organization to increase focus on that service lines. The Establishments under one leader of an end to end delivery organization in the dramatically reducing our unit cost of delivery was optimizing delivery KPIs and the approval to hire 500 plus revenue generating associates over the coming quarters, a combination of customer facing and sales support professionals will help us expand existing accounts as we generate new ones.
Finally, we need to drive more of a performance culture in our client teams. Therefore, we will overhaul our sales commission plans for the new fiscal year, ensuring we can better attract, retain and reward top performers. The new plant will have a greater mix of variable compensation, ensuring greater meritocracy and better align our overall incentives with the company's strategic direction.
The growth mandate is now starting to permeate the entire company informing our big decisions and investments and beginning to reshape the critical behaviors of our employees. As we focus on growth, we have also need some operational and cost structure decisions that Karen will address later in the call. This will help our cost structure in the second half even ahead of the full conclusions of the transformation office. Cognizant is a vast organization brimming with talent in the time of change, we must engage the winning spirit of our 290,000 associates to get back to the basics that resulted in our long record of success.
Leaders are key in transitions, for most talented leaders who are at the director level and above, we have recently implemented a retention program to let them know have value there and how committed we are to their continue to create growth with us. Communication is more important than ever right now so in recent months, we've also greatly increased communication to our associates. We've stressed that growth is a number one priority and provide context on which -- and what is needed for us to return to growth. Personally I am spending a lot of time meeting with associates, reminding them of our tremendous assets and great heritage about building on and a substantial market opportunity in front of us.
Let me wrap up by saying that I now have a much clearer understanding of the market opportunity which is meaningful and Cognizant's opportunities and challenges against this backdrop. While we've taken some tactical decisions in the last three months on cost and growth, the true potential of Cognizant and the extensive to work to be done on costs and transformation in the quarters ahead is becoming apparent via the transformation office. The opportunity teed up from the output of these work streams gives me reason to be optimistic, I see plenty of opportunities to take cost out of the business. To invest in growth as we improve our working capital, we will spend more time on this in the third quarter earnings call.
I've covered a lot of grounds so let me quickly underscore the five focal points of our work; refining our strategic posture, developing greater thought leadership and an innovation agenda by industry sector, accelerating investments in growth, significantly lowering our cost structure and ensuring greater operational discipline and a more performance-based culture. Well, there is a lot of work to be done to ensure Cognizant returns to its historical levels of performance, we can assure that you that our team is up for the challenge and looking forward to winning again.
With that, it's my pleasure to turn the call over to Karen, who will give you an update on both our operational and financial performance as well as a view on how we see the balance of the year Karen?
Karen A. McLoughlin -- Chief Financial Officer
Thank you, Brian, and good afternoon everyone. Second quarter revenue of $4.14 billion was at the high end of our guided range and represented growth of 3.4% year-over-year or 4.7% in constant currency. Digital revenue growth accelerated from previous quarters to the mid 20% range and now contributes approximately 35% of our total revenue.
Moving to the industry verticals where overall company performance continues to be impacted by both financial services and healthcare, financial Services growth was up 1.7% in constant currency driven by modest improvement in banking, primarily from the contribution of the previously announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform. In insurance growth continued to be sluggish as delays in decision making impacted the start of new work from projects in the pipeline.
We anticipate some improvement in insurance in Q3 with the ramp up of several of these projects. In banking, we continue to see softness at a few of our largest banking clients and a cautious approach to spend with several of our regional banking clients in North America, they were impacted by M&A activity. Consistent with recent trends, two of our top five banking clients continue to show good growth while spend at the other three clients remains under pressure.
We anticipate some cautiousness in overall levels of spend in the banking sector in the second half of the year due to weakness in capital markets across banking, M&A activity with US regional banks and weak macro factors.
Moving on to Healthcare, which declined 1.5% year-over-year in constant currency. Within our Healthcare vertical the decline with our payer clients was largely the result of several large clients involved in mergers as well as the accelerated movement of some work to a captive at a large client. We continued ramp-down of an account in which we were a subcontractor to a third-party also continued to negatively impact revenue. While the ramp down of the work is largely complete, we expect some continued year-over-year revenue impact in Q3 and a minimal impact in Q4. For our payer client moving work to a captive and those involved in mergers, we expect the second half of the year to stabilize near Q2 levels. We continue to expect that there will be meaningful future revenue opportunity associated with integration work that typically follows a merger.
Life Sciences had another quarter of double-digit growth year-over-year. We are seeing good traction for digital operation services managing pharmacovigilance cases globally, large enterprise transformation deals and momentum with our industry specific platforms such as the shared investigator portal for clinical trials. And as Brian mentioned, we closed the acquisition of Zenith Technologies earlier this week. Products and Resources had another strong quarter, showing 12.3% growth year-over-year in constant currency. This is the sixth consecutive quarter of double-digit constant currency growth. We saw continued positive momentum in retail where we have low above the company average mix of digital revenue in our largest clients. And we continue to see strength in cloud and digital engineering services and increased demand for interactive IoT and analytics solutions across clients.
Our communications media and technology segment had another strong quarter with year-over-year growth of 14.1% in constant currency. Technology saw a double-digit growth driven primarily by our digital content services and solutions. Through our acquisition as Softvision, we are also seeing good traction for digital engineering solutions with our technology clients.
Within Communications and Media growth was negatively impacted by spending reductions in a few large clients. As we move into the second half of the year, we expect to see some slowdown in the year-over-year growth rate at the technology vertical as we start the significant ramp-up of the digital operations work with several large clients. We expect this to be partially offset by improvement in communications and media.
Now moving onto the geographies. Europe grew 14.2% year-over-year in constant currency. In both the UK and Continental Europe, we saw strength in West Sciences and while a few of our larger banking relationships in Europe remained under pressure we did see good growth from several of our newer logos including the partnership with the three Finnish financial institutions. Additionally, in the UK, we saw strength in products and resources. The rest of the world grew 6.4% year-over-year in constant currency.
Results in Asia Pacific, continue to be negatively impacted by the weakness in some of our larger banking clients. We saw a double-digit growth of insurance, manufacturing, logistics and life sciences clients in the region as well as good traction with winning work with a number of new clients.
Shifting now to margins. Our GAAP operating margin and diluted EPS were 14.9% and $0.90 respectively. Adjusted operating margin which excludes realignment charges with 16.1% and our adjusted diluted EPS was $0.94 in the quarter. Our adjusted operating margin was in line with our expectations but down approximately 300 basis points year-over-year. While year-over-year head count growth slowed from the prior two quarters, the year-over-year decline in operating margins was primarily due to cost related to headcount growth of 7% outpacing constant currency revenue growth of 4.7% in the quarter. And the impact of contract renegotiations with recently merged healthcare clients which negatively impacted operating margins by 320 basis points and 40 basis points respectively. Revenue and head count in digital operations continues to grow above company average. And we saw slight increase in the onsite mix at senior levels of the organization.
This was partially offset by lower incentive and stock-based compensation, the lower segment operating margins in our communications media and technology segment reflects the growth of digital content services and solutions in this segments which generate lower margins and other services in the portfolio.
For the remainder of 2019, we expect margins to improve as we align our cost structure with our revenue expectations. While we expect to be in a better position to discuss our longer-term view of margins in the coming quarters, there are several areas that we can and will address in the second half of the year to allow us to reduce costs to reinvest in areas to drive growth including attracting and retaining the best talent and expanding our portfolio of digital solutions.
Even ahead of the conclusions of a broader benchmarking exercise, in the second quarter we took targeted actions at the senior levels of our pyramid to simplify our organization structure. These actions are expected to result in$65 million of annualized savings for the approximately half of that to be realized in the remainder of 2019.
In Q3 and Q4, we expect to further reduce overall cost through a number of actions, including aligning headcount growth with revenue growth by further slowing the pace of hiring and being thoughtful on where we backfill attrition. Headcount growth on a full year basis well aligned to our full-year constant currency revenue guidance, with greater discipline on capturing improved pricing levers more closely aligning promotions and wage increases with bill rate adjustments, more rigor around redeploying unbilled resources in our accounts, we will continue to optimize our pyramid by adjusting our spans of control. We will have enhanced oversight regarding our use of subcontractors in the balance between subcontractors and full-time associates.
We will also have significantly tighter control of areas within SG&A such as disciplined hiring of non-billable resources, further rationalization of our real estate portfolio, tighter control over T&E including significantly reduced travel for internal and other non-client facing meetings, limiting business class travel, relocations, etc.. And only investing in marketing events that will provide an appropriate rate of return. These actions will help fund our continued investment in areas of support revenue growth. Additionally, the shift to higher value services such as digital will continue to support higher margins. From a people and talent perspective, our annualized attrition rate of 23% was up from 19% in Q4 but flat versus the prior year quarter. We continue to focus on our workforce strategy and management such as the announced retention program to recognize and retain our best talent, we expect to incur an additional $48 million of compensation-related cost during the remainder of 2019 for this program.
Turning to our balance sheet which remains very healthy. We finished the quarter with $3 billion of cash and short-term investments, down $1.5 billion from December 31, 2018. This decrease is largely due to the $1.8 billion of share repurchases completed year-to-date under our stock repurchase program including over $1 billion of repurchases in the second quarter.
As a reminder, our short-term investment balance includes restricted short-term investments of $429 million related to the ongoing dispute with the Indian Income Tax department. We generated 479 million of free cash flow in the quarter. Additionally, we had an uptick of DSO of three days compared to Q2 2018, which negatively impacted free cash flow by $135 million. Approximately half of the DSO increase was due to unbilled receivables related to the billing construct of certain long-term contracts.
We believe that we have the opportunity to improve our cash conversion and are initiating a working capital programs that we expect will improve free cash flow by several $100 million in the coming quarters. Our outstanding debt balance was 746 million at the end of the quarter, tere was no outstanding balance on the revolver. During the second quarter we opportunistically repurchased approximately 18.7 million shares for approximately $1 billion and our diluted share count decreased 564 million shares for the quarter.
On a year-to-date basis, we have repurchased over 28 million shares for approximately 1.8 billion. We have $738 million remaining under our existing share repurchase authorization Through our cash generated from operations, remaining cash on the balance sheet and our revolving credit facility, we continue to have access expense you have liquidity to fund both capital return and acquisitions.
I'd now like to comment on our outlook for Q3 and the full year 2019. For the full year 2019, we expect revenue to grow in the range of 3.9% to 4.9% year-over-year or $16.75 billion to $16.9 billion dollars in constant currencies. Based on current exchange rates, this translates to growth within the range of 2.8% to 3.8% or $16.57 billion to 16.73 billion reflecting our assumption of a negative 110 basis points for foreign exchange for the full year, compared to an assumption of a negative 90 basis points in our prior guidance. This guidance continues to reflect the muted outlook for banking and healthcare.
For the third quarter of 2019, we expect to deliver revenue growth in the range of 3.8% to 4.8% year-over-year or $4.23 billion to $4.27 billion in constant currency. Based on current exchange rates, this translates to growth in the range of 2.9% to 3.9% year-over-year or $4.2 billion to $4.24 billion reflecting our assumption of a negative 90 basis points for foreign exchange for the third quarter. For the full year 2019, we expect adjusted operating margins to be approximately 17%. Based on the actions taken in Q2 and perspective cost alignment actions for the remainder of the year, we anticipate adjusted operating margins of approximately 18% in both Q3 and Q4.
We expect to deliver adjusted diluted EPS in the range of $3.92 to $3.98, an increase from our previous guidance of $3.87 to $3.95. Primarily reflecting a lower share count assumption based on the steps up repurchases completed in the second quarter and the contribution incentives. This guidance anticipates a full year share count of approximately $562 million shares and a tax rate in the range of 24% to 26%. Guidance provided for adjusted diluted EPS excludes realignment charges and other unusual items if any, net non-operating foreign currency exchange gains and losses, clarification, if any, by the Indian government and to the application of the Supreme Court ruling related to the India defined contribution obligation and the tax effects of the above adjustments. Our guidance also does not account for the impact from shifts in the regulatory environment including areas such as immigration and tax.
With that, we can open the call for questions. Operator?
Questions and Answers:
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. In the interest of time, we ask that you limit yourself to one question. Our first question comes from the line of Keith Bachman from Bank of Montreal. Please proceed with your question.
Keith Bachman -- Bank of Montreal
Hi, thank you for taking the question and welcome again, Brian your first quarter under ownership, so to speak. And my question is going to be directed toward you. Is there is a lot of moving parts, it sounds like both on how we think about all sense of trying to chase revenue as well at the same time trying to balance cost. And so we have your margin targets for the year but just philosophically, how should we be thinking about these two goals of trying to really nurture the revenue line while at the same time trying to ask optimize the cost structure? How should investors be thinking about this over the course of this longer journey?
Brian Humphries -- Chief Executive Officer & Directo
Hi, Keith. Well, I mean the first thing I'd say is, I do not believe we are mutually exclusive. But let me start first would revenue and then I'll spend some time on cost. We grew, as you know, 4.7% this quarter in constant currency and within that construct I would say, we had very muted performance in two of our largest segments; banking and financial services, and indeed healthcare which represents 63% of the business, so one of the first things we have to do to get back to a stronger growth performances to actually help turn those businesses around, just a law of numbers becomes meaningful.
And on top of that I think we are at this stage now of investing more in growth, changing the dialog internally, prioritizing growth as you've seen, we have approved at this moment in time and I believe over time will add to this number over 500 revenue generating resources or revenue support resources. So the inclination is to get back to what we've always done, which has been to focus on client centricity and revenue growth.
Now, cost is of course an strategy is important to revenue growth. First of all, what are strategic postures, how we exposed to faster-growing categories of the market which are both technology categories such as digital engineering or way of working IoT cloud as well as geographic categories and that's why I am pleased to see the continued momentum we have in the global growth markets which is our non-North America region. Cost, however, are important to growth because you need to have a very efficient and disciplined cost base to be able to take pricing in the deals, to be able to absorb the renewals, pricing pressure that we are seeing in our traditional business, as well as being able to invest in the future. I talked in my prepared remarks around the importance of pivoting to digital and the associated parameters of that smaller TCV contracts, more contracts, a different delivery model, etc..
We also need to invest in people, in M&A and indeed in the brands to make sure that we are more associated, not just with the area of the business where we are loved by customers, but also with the pivot to digital. Many of these areas, as you know, Keith are constrained assets both M&A targets as well as even just getting digital resources into the company. But I will say I'm four months in at this stage, having interrogated the data for four months and having spent a great deal of time in the transformation office, I see huge opportunity here on revenue growth and indeed on costs. I'm not going to get into a guidance discussion today around next fiscal year or indeed in multi-year view but at this moment in time this from my perspective is something that I only see opportunities to improve our performance from today's performance.
Operator
Our next question comes from line of Tien-Tsin Huang from JP Morgan. Please proceed with your question.
Tien-Tsin Huang -- JP Morgan -- Analyst
Thank you so much. Glad to see a lot of heavy buybacks, well done there. I want to ask actually on gross margins, it looks like it's the lowest level we've seen in some time. What's driving this? I heard the healthcare renegotiation, I'm not sure if that was related there and any comments on pricing contract mix issues execution, that kind of thing and maybe any outlook on gross margin. Thank you.
Karen A. McLoughlin -- Chief Financial Officer
Tien-Tsin, it's Karen. It's really two factors. One of which is the healthcare renegotiations, as you talked about, which is about a 40 basis point impact in the fall in gross margin. And then also the fact that head count continue to grow faster than revenue in the quarter. Part of that is our digital operations business which is growing considerably faster than head count and then for a company revenue at this point. Head count grew in line with the revenue growth, digital operations. But you know that does come at typically of lower gross margin than the IT business. But overall head count for the rest of the business to grow faster in revenue and the vast majority of that cost is sitting in gross margin and that is obviously one of the things as we continue to focus on tackling the cost of delivery to the organization we will be looking to optimize in the coming months and quarters.
Operator
Our next question comes the line of Lisa Ellis from MoffettNathanson. Please proceed with your question.
Lisa Ellis -- MoffettNathanson
Hi, good afternoon. Thank you. Brian, as you're thinking about your overall strategic plan, can you provide a little bit more color on how -- you believe you guys should be tackling the deterioration in Cognizant's traditional services, meaning shifting away from or reaccelerating or whatever the right answer is, you know hose more traditional legacy pieces of the business, which just as an industry level may be flat or even in structural decline that strikes me, it's one of the trickier aspects things to navigate through here. Thank you.
Brian Humphries -- Chief Executive Officer & Directo
Yes. It's a good question because we have strength in our existing customer base. And if you look at greater, we have very strong positions in they are highly concentrated in a set of customers but we need to pivot more to digital. And as we are pivot into digital as I said, there are different characteristics of the deals, of the skill sets we need, of the delivery models, of the buying decision makers, if you will on behalf of the customers and this is an area we definitely want to invest into the excess curve and make sure we are from a capital allocation point of view really prioritizing that.
Now, on the more traditional businesses, some of them actually give us a foothold into the new application modernization will go hand in glove. As I said with the digital engineering space as we start thinking about cloud native applications but in a broader sense of the word Lisa on a big believer in drawing hard decisions across your portfolio and trying to understand where you need to be extremely
disciplined from an investment and from a cost structure point of view, in terms of optimizing legacy while investing in the new and those are disciplines we need to obviously continue to drive here in Cognizant as we're investing in some of these newer growth categories that should etc. at CAGR our growth.
You have seen in the last quarter we have aggregated all of delivery under one leader, previously delivery was fragmented through a number of leaders in the company. And part of the task of that delivery leader is ultimately to drive a much more aggressive stance in terms of how we think about automation and tooling and put ourselves in a position that we can be what I would term fit for growth in the legacy as well as the broader companies, so optimizing the cost structure in particular for the legacy and freeing up capital to invest in the new categories which should be the growth driver for Cognizant going forward.
Operator
Our next question comes from the line of Ed Caso from Wells Fargo. Please proceed with your question.
Ed Caso -- Wells Fargo
Thank you. Welcome. Can you talk a little bit about your capital deployment strategies from this space, obviously deployed a lot of capital for repurchase, where does M&A fit into the equation sort of order of magnitude and is there more share repurchase to be done in the near term? Thank you.
Brian Humphries -- Chief Executive Officer & Directo
I will touch upon this and Karen can jump in as well. Look, we saw the opportunity to accelerate share repurchases in the last quarter as an opportunistic situation for us and we took advantage of that and I have no issues continuing to do so if needed. From an M&A point of view, I have rejected some M&A and I have approved some M&A in the last four months. So we will look at that as a meaning to execute our strategy. We are pleased to have acquired Zenith Technologies which closed most recently and obviously we're using M&A as a means to an end. It is not a strategy, it's a means to execute a strategy.
Our priority right now is continuing to refine our strategic posture and making sure to the prior question we get our capital allocation correct. But we will look at on M&A as something that we will use to execute our strategy going forward. My emphasis at this moment in time continues to be look in acquisitions that strategically align us to even better our competitive position in the market that we deem most relevant to us going forward.
Karen A. McLoughlin -- Chief Financial Officer
And I think it's Karen. Obviously the guidance for the share count does not assume any more buybacks for the rest of the year. As Brian said, we will continue to look at that opportunistically but as you know we have far exceeded our initial expectations for this year in line with this framework. We outlined last year at Investor Day where we said we expect to spend on average 25% of our global free cash flow toward buybacks 25% toward dividends and 25% for acquisitions with the rest going to India at this point. There are no changes to that framework if and when there are, we will obviously update accordingly.
Operator
Our next question comes from line of Bryan Bergin from Cowen & Company. Please proceed with your question.
Brian Bergin -- Cowen & Company
Hi. Thank you, Brian. Can you give us a sense on, just your view of the time frame or what you think it's going to take for Cognizant to address the company specific issues that you noted in the core verticals there? And then the transformation office work streams, that's already been set up and that's in progress or is this now to come in 3Q and 4Q?
Brian Humphries -- Chief Executive Officer & Directo
No. The transformation office was set up probably almost three months ago at this stage to be honest. It consists of six work streams. As I said, each has led by one of our Executive Committee members, each one has a steering committee and indeed the working committee below that. We've been very clear in outlining some positions that I want us to back to an expected outcomes and as part of that and some short-term wins along the way. So we've been also very deliberate, Brian. In terms of the composition of the teams making sure we have people that are cross-functional in nature, people who understand the markets, both in North America and internationally people that understand delivery as well as the market facing commercial teams and I really feel very, very enthused from the outset of the work we've been working extremely hard on that, but it gives me nothing but optimism that there is a huge opportunity for us to free up capital to invest in growth to simplify the organizational structure, clarified roles and responsibilities and ultimately to make us much more successful in the market by accelerating revenue growth and having better solutions for being fair to our clients.
So I feel great about that. It is not a new initiative. It's been well under way. And frankly, I'm probably more advance in my thinking in the output of that where I potentially considered I would be three months ago.
With regards to banking and healthcare, we've changed that the leaders of both. This will be some heavy lifting if I'm very honest, some of it is because of and Cognizant specific issues that are reflective the market reality of some M&A in Healthcare where we are heavily exposed to four firms that have merged and some of that currently relates to just the need for us to ship faster to digital, have more thought leadership to be even more client-centric and indeed to add more sales coverage and those are things that are under way at the moment both in healthcare and indeed in our financial services practice or banking practice.
I should clarify that our business in life sciences is very strong. It continues to grow double-digits. It's one of the areas of our portfolio that I feel best about. We have a strong strategy, a strong leadership team. We know the end to end value chain for customers and therefore M&A is facilitated against that and we are doing a little better insurance than we are in the core banking business and as I said on the call, we've made some structural changes in the banking team to really put dedicated teams behind hunting on new logos behind some of our most strategic accounts that we deem platinum, as well as more broadly, I believe that in the world of digital extra emphasis on thought leadership and innovation agenda is required and then my dealings with clients over the last four months, it has become very apparent that we are very established in the legacy or traditional models but our brand attributes and perhaps our thought leadership isn't where it needs to be on the side of that asset in the digital and that is an area that we need to do better in.
If you do look at the competitive market in terms of what has been announced in the last quarter, it's also clear that there is market growth at there in banking, and indeed in healthcare and certainly from a banking point of view, we've seen most of our competitors in financial services and insurance grow from the low to the high-single digits and indeed some even into the double digits.
So we have to accelerate quicker, get back on the attack. Make sure we hold our thought leadership and get a team that are constantly in front of clients with a agenda around innovation that helps customers think about how they can accelerate our pivot to digital. I have not seen in any dialog with customers, any macro concern around their desire to spend on innovation invariably the conversations we're very clear if we show up put enough thought leadership and innovation they have budget and of course the pivot we need to make us to ensure we are cost disciplined on the legacy side of our business to ensure that we can absorb those cost demands at the time of renewals while accelerating our investments into the new.
Operator
Our next question comes from line of Bryan Keane from Deutsche Bank. Please proceed with your question. Mr Keane your line is live.
Bryan Keane -- Deutsche Bank
Hi. I wanted to ask about attrition, I thought that it was up a little bit although year-over-year it's pretty similar. Where do you expect attrition to go? Do you expect it to stay elevated or do you expect to come back down? And maybe you can just talk about if you guys have lost any key managers are personnel and just thinking about the morale of the company through all these changes? Thanks.
Brian Humphries -- Chief Executive Officer & Directo
Let me start with the broader question around leadership and then Karen can jump in on the attrition question. I mean, to be very clear in a company of 300,000 employees. We will always have leadership changes and it's pretty standard. When you have a new CEO comes on board and we have been fortunate that at the time of my appointment and indeed before that the board secured certain executives to see through a CEO transition and I'm grateful for their ability to actually get us through that first four to six months of my tenure because it's certainly allowed me to time to get deeper into the business and to make sure that I was ready to run forward.
My perspective is we needed greater emphasis on our customers, greater energy, fresh perspective and candidly in dealing with clients, typically the question that was asking were how often you've seen our team, the thought leadership we brought to bear and how we stack up versus the competition and also who were some of the best people in the industry that they recognize and value as people when they are dealing with them. So we have made some very deliberate changes. Now, of course, we've also had some other departures and I think that's normal particularly in a company that has had a relatively stable leadership team over the best part of two decades. This is not something I will say that I am overly concerned about the emphasis on growth is permeating through the organization, the people who are touching customers day in and day out typically not the executive team but the client partners and those client partners are really in my mind enthused with the renewed focus on growth after a few years of more focus on margin rate, if you will. Now of course don't get this wrong, I'm not taking this for granted by any means we are paranoid at the first line of the P&L is the customer but from my perspective, this is a very manageable condition, we're going through and we've made some strong internal promotions. The new Head of North America DK has been with Cognizant for over 20 years
and he is ultimately and focused and has always been focused across multiple verticals on the growth. I'm also pleased of promoted for deep in delivery somebody who has been with Cognizant for 23 years to enable us to get much more focus in terms of optimizing our delivery structures. And we complemented them with some external hires, some executives who used to work at Wipro, Indeed more recently Ganesh Iyer who was the ex-CEO of Mphasis. So my sense is we want to have the the best team we can get our hands on, a team highly motivated, energized moving with the same speed and urgency that I have and absolutely focused on their teams and under customers.
Karen A. McLoughlin -- Chief Financial Officer
And so Brian as it relates to the 23% as you said. It is flat year-over-year and as you know there is some seasonality to attrition. So typically after bonuses are paid in March, we do tend to see attrition tick up. Really no changes in terms of the attrition in terms of where it's coming from up and down the pyramid. The only exception being the director plus attrition ticked up a little bit based on the actions that we took in June as part of the realignment program. But that was the only real -- I would say significant change in attrition, both in terms of geography as well as up and down the pyramid. Now I would expect it's going to continue to be lumpy, as we've said for some time now the job market is strong and as well as we look to optimize cost structure for the organization, that one is itself likely to create some churn.
Operator
Our next question comes from line of Jim Schneider from Goldman Sachs. Please proceed with your question.
Jim Schneider -- Goldman Sachs
Good afternoon and thanks for taking my question. As you look forward to the next few quarters, it sounds like you expect continued muted trends in financials and maybe some improvement in healthcare as you get to the end of the year. I guess my question is your Q4 guidance sort of implies that things remain muted, a kind of across the board for some time. Is that just a level of conservatism relative to the outlook or do you actually see some some headwinds in other segments that could be potentially offsetting that recovery?
Karen A. McLoughlin -- Chief Financial Officer
So, Jim this is Karen. Let me tackle that. So Q3 to Q4 there is actually a decline in bill days of about two days and that will cost about $47 million on a constant currency basis. So from a modeling perspective if you were to take the middle of the range for Q3 and then the middle of the range for the full year guidance that would actually stay on a volume basis that Q4 will be flat with Q3. There will be some puts and takes as we've talked about in our comments, we do expect to see some stabilization of healthcare off of the Q2 number is not on a year-over-year basis it will continue to show challenges but we do expect it to stabilize on a sequential basis going forward.
We do expect, as I said a little bit of slowdown in the technology practice just given the tough year-on-year comps as we get back into the back part of the year, But that was in our guidance for this quarter as well as last quarter. So no real change there from that perspective.
Operator
Our next question comes the line of Joseph Foresi from Cantor Fitzgerald. Please proceed with your question.
Joseph Foresi -- Cantor Fitzgerald
Hi. I wonder if you could talk about your positioning in digital. Do you think your competitive in that business or is there a catch up to be done and I think most importantly, how does one company catch up in digital and close the gap if there is one? Thanks.
Brian Humphries -- Chief Executive Officer & Directo
So, this is Brian. I'll start there position in digital -- there are areas that I've been really blown away with and that have really I've left reviews feeling very proud about what we have and feeling as what we definitely have a strong foundation to build from. I talked today about the digital engineering team, I've spent a lot of time with Cognizant's Softvision team. But more broadly within Cognizant we had legacy digital engineering as well as the application modernization efforts that collectively -- it really puts us in a position if you think about 11,000 plus resources with over 800 million of revenue. It puts us in an incredible position to increase our brand recognition and really dramatically change our position in the market vis-a-vis some of the, let's say, currently known meters out there.
IoT is a few hundred million dollars for us and we have broad offerings that are aligned by industry vertical and I'd expect us to go accelerate that as part of our strategy. More broadly, there are organic investments we need to make. There will be some inorganic plays, we need to make there too. But as I said, I'm not working on something huge at this moment in time and it will be more tuck-ins aligned to our strategy. And of course behind any organic and indeed inorganic acquisitions, how do you scale digital -- will you need to have a brand, you need to have capabilities and you need to have systems and tools and the sales and marketing engine facilitated. That's why I explicitly called out thats the fact that we are going through pivot which requires us to do some work, it's more project oriented work that's good and bad, you need to sell more projects they have lower TCV but unlike the legacy business, we will not have the same renewal price erosion that we are faced within the legacy.
We need to have a set of client partners that are capable of speaking to the right level of the organization that typically will extend well beyond the CIO different decision makers and buyers right from the CMO up to the CFO and indeed the CEO. And indeed know how to speak and how to follow up on what collaterals leave in what use cases to bring in and obviously what industry expertise to bring with them into the conversation, more consultative of selling and with all these practical things that are very often overlooked, but nonetheless critical in my opinion to running a world-class operation things like sales commission plans that need to change and therefore we need to orient more of our commission toward aligning our sales into areas of the -- that are aligned with our strategy.
So that is not something we've historically done. It is something we will do going into the new year and indeed the delivery capabilities from an agile delivery point of view becomes relevant as well. I do feel that as we have near on and indeed offshore capabilities, if you think about something like digital engineering, if we are able to take the guild and pod model that we have an extended much from nearshore but indeed off to offshore centers, I believe we will have a huge advantage over some of the other players that you know. So listen, this is an area that I'm pumped about, I'm excited about the possibilities we have, and I've seen a lot of goodness in the operations, we of course now need to accelerate our investments in it and make sure that we take this strategy into execution and rest assured we're very focused on that.
Karen A. McLoughlin -- Chief Financial Officer
I think we have one more question.
Operator
Our final question comes from line of Rod Bourgeois from DeepDive Equity Research. Please proceed with your question.
Rod Bourgeois -- DeepDive Equity Research
All right, thank you. Brian, so I appreciate your candor and admitting that Cognizant's weak growth in banking and healthcare is mostly due to company specific issues. And my question is do you have a point of view at this point on what Cognizant's growth rate would be today if it weren't for these company-specific issues that you're needing to fix? And I guess on a related note, you're making a lot of internal changes now, I'd like your perspective on whether you think these internal changes will cause additional growth disruption in the upcoming months?
Brian Humphries -- Chief Executive Officer & Directo
So, Rod. Hi, it's of course hard to extrapolate the implication. But you can do a sliding scale analysis to understand that for every 100 basis points of improvement in healthcare or banking, what is the implied implication on the broader Cognizant story. But given they are 63% of the business, you can clearly understand that these are meaningful ships to our overall numbers in every 160 basis points, 160 or so million of growth is one point of growth for us and every 6 million, a bottom line, it's $0.01 EPS for us.
So these are important levers for us to get right. We do have a lot of balls in the air at the moment. And that's why we are very, very deliberate around the transformation office. We have started with people who know the company well. They have been surrounded by management consultants, both internal and indeed external. We have a huge operation cadence behind that and a broad framework of change management, communication and indeed an execution layer that needs to happen and Rod by definition you will always go home at night. I'm wondering if you're going too far, too fast. But I've got to be honest, I have a great sense of urgency. I'm really proud to have this role, I am really proud to have inherited an organization that is, in my mind full of talent and I want to leave them forward then I believe that we are going at the right pace to catch up where we need to catch up and to extend our leadership where we think we're in front. But we're spending a lot of time around operational excellence and rigor and making sure we contextualize these exchanges. It's clear certain employees will be concerned around the amount of work in the hours, in the pace in the decision making. But my belief is that my executive level, I've had a number of executive committee meetings now we have a cadence of two days every month. We've had some really, really constructive meetings where the team are on board and we are making the decisions in my opinion needed at this moment in time to put Cognizant in a position where we can unlock our true potential.
Karen A. McLoughlin -- Chief Financial Officer
Right. And with that the concludes today's call. Thank you all for joining, and for your questions.
Operator
[Operator Closing Remarks]
Duration: 60 minutes
Call participants:
Katie Royce -- Global Head of Investor Relations
Brian Humphries -- Chief Executive Officer & Directo
Karen A. McLoughlin -- Chief Financial Officer
Keith Bachman -- Bank of Montreal
Tien-Tsin Huang -- JP Morgan -- Analyst
Lisa Ellis -- MoffettNathanson
Ed Caso -- Wells Fargo
Brian Bergin -- Cowen & Company
Bryan Keane -- Deutsche Bank
Jim Schneider -- Goldman Sachs
Joseph Foresi -- Cantor Fitzgerald
Rod Bourgeois -- DeepDive Equity Research
