Cognizant Technology Solutions Corporation (NASDAQ:CTSH) Q3 2022 Earnings Call dated Nov. 02, 2022.
Corporate Participants:
Tyler Scott — Vice President, Investor Relations
Brian Humphries — Chief Executive Officer
Jan Siegmund — Chief Financial Officer
Analysts:
Lisa Ellis — MoffettNathanson — Analyst
Rod Bourgeois — DeepDive Equity — Analyst
Ashwin Shirvaikar — Citi — Analyst
Bryan Keane — Deutsche Bank — Analyst
Zack Ajzenman — Cowen — Analyst
James Faucette — Morgan Stanley — Analyst
Tien-Tsin Huang — JPMorgan — Analyst
Darrin Peller — Wolfe Research — Analyst
Presentation:
Operator
Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2022 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.
Tyler Scott — Vice President, Investor Relations
Thank you, operator, and good afternoon, everyone. By now you should have received a copy of the earnings release and investor supplement for the company’s third quarter 2022 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today’s call are Brian Humphries, Chief Executive Officer; and Jan Siegmund, 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 were 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 like to now turn the call over to Brian Humphries. Please go ahead, Brian.
Brian Humphries — Chief Executive Officer
Thank you, Tyler. Good afternoon, everyone. Third quarter revenue was $4.9 billion, up 5.6% year-over-year in constant currency, short of our expectations. Adjusted operating margin grew 90 basis points sequentially and 60 basis points year-over-year to 16.4% of revenue. While uncertain macroeconomic backdrop impacted bookings and revenue the primary driver of the revenue shortfall relates to reduction in US onshore billable resources in recent quarters, following a period of elevated attrition and reduction in Visa travel and a COVID-induced shift in near and offshore delivery centers. Financial impact of this headcount reduction is magnified, given this is our highest revenue and margin dollars per head population. Reverse this trend, we have already initiated a series of actions that are intended to increase US onshore billable resources including enhanced focus on lateral hires and subcontractors, accelerated Visa travel and targeted compensation programs. While these actions are gaining traction, it is somewhat slower than previously anticipated. We therefore expect these headwinds to continue in the fourth quarter, ahead of clear progress in Q1.
Let me now turn your attention to global third quarter voluntary attrition, which was a little higher than expected in the quarter. Voluntary attrition fell 2 points sequentially to 29% on an annualized basis and fell 3 points sequentially on a trailing 12-month basis. We’ve taken extensive actions to increase employee engagement and reduce attrition over the past year. These initiatives coupled with an uncertain macroeconomic backdrop have led to reduced daily resignations, a leading indicator of voluntary attrition across the globe in the last four months.
We expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter. We maintained positive momentum on resignation, we are continuing our comprehensive effort to attract, retain and rally employees. We remain focused on our people strategy, which includes our refined promotion initiatives, learning and development and enhanced compensation and benefits programs. For instance, we recently communicated to our associates that we will accelerate next year’s merit cycle to the second quarter of 2023. Meaning, we will have two merit cycles in the space of six months for most of our associates.
I would like to now discuss the macroeconomic environment, which Jan will also address in our fourth quarter guidance. We see clients closely scrutinizing and slowing their investment decisions, faced with a backdrop of uncertain economic conditions. [Indecipherable] has been reduced on lower priority projects or those with a longer return on investment. We’re seeing some early signs of slowing in discretionary in digital projects. Industry wise, we’ve seen weakness in banking, especially in the mortgage segment, health sciences and retail. In our international business, UK remains solid. The deal cycles are slowing while continental Europe is showing signs of weakness. From a commercial point of view, despite strategy to sell solution and deliver client outcomes, we remain exposed to time and material engagements across all industries. We’ve seen clients curtailing their spending and we expect furloughs to impact the fourth quarter. These factors contributed to a decline in bookings of 2% year-over-year in the third quarter, representing an in-peroid book-to-bill ratio of 1.0 times and a book-to-bill ratio of 1.2 times on a trailing 12-month basis.
Turning now to our industry segment performance, financial services grew 1.6% year-over-year in constant currency, led by growth in our insurance business. This includes a negative impact of 180 basis points from the exit of Samlink. In insurance carriers of all lines of business are enhancing their digital capabilities, driven by demand for new insurance products and improved user experience. For example Resolution Life US, turned to us to execute several digital transformation initiatives. That includes large scale data and application core modernization and cloud migrations. We’re also helping them develop and scale advanced capabilities in data and analytics to drive significant operational efficiencies in their close book portfolio. We were selected by AXA UK & Ireland as a technology partner to help consolidate modernize and manage partner their IT operations. AXA is transforming its technology ecosystem to create a more digitally-enabled, modern and agile environment that’s data-rich, secure and sustainable.
Health Sciences revenue grew 5.5% year-over-year in constant currency driven by digital services among pharmaceutical and healthcare payer clients. I’m pleased to note that our Shared Investigator Platform as SaaS solution for pharmaceutical companies that streamlines clinical trials to improve the speed of drug discovery has surpassed 250,000 users across 100 countries worldwide. Kyowa Kirin a Japanese pharmaceutical and biotechnology company has signed a multi-year agreement with Cognizant to provide global pharmacovigilance services and help improve patient health through the analysis of adverse reactions across its products.
In Products and Resources, revenue grew 8.2% year-over-year in constant currency. Growth was driven by demand for digital services among logistics, automotive, consumer goods and travel and hospitality clients. During the quarter we extended our long-standing relationship with Centrica. The UK’s largest supplier of energy and energy services to deliver business-critical services encompassing application testing, cloud infrastructure supports and IT infrastructure management. Communications Media and Technology, revenue grew 10.4% year-over-year in constant currency driven by strength among digital native clients. We’re expanding our collaboration with Qualcomm to accelerate digital transformation through a new 5G experience center in Atlanta. The collaboration combines our deep expertise in 5G, IoT, cloud and data analytics with Qualcomm’s Intelligent Edge devices, AI and 5G connectivity solutions. We’ve also had our first substantial win in the legal sector, which has traditionally been a late comer to ad sourcing and digital services. Freshfields selected us to manage their global IT operations and support their ambitious global expansion plans.
We’ll be providing 24/7 managed service of the firm’s IT infrastructure and applications as well as managing its service desk. Cognizant will also help define Freshfields technology transformation roadmap. As I mentioned in our last earnings call, targeted M&A remains an important tool for enhancing our competitiveness. We have several M&A targets in the pipeline in-line with our strategy and capital allocation framework. As always, we continue to focus on opportunities which are value-accretive to Cognizant shareholders and aligned with our strategy.
Yesterday, we announced an agreement to acquire the, professional services and application management practices of OneSource Virtual, a workday partner based in Dallas. These practices will complement our existing finance and HR advisory services on the Workday Cloud platform. The acquisition is anticipated to close by year end 2022, subject to satisfaction of closing conditions. At which stage we expect to welcome nearly 400 new employees to our strategic Workday practice.
Importantly we continue to strengthen our leadership team. Last month, we named Ravi Kumar, President of Cognizant Americas, who will join us in mid January from Infosys, where he served as President for the past six years. Ravi brings clients interest being a growth mindset that we believe will help improve our US revenue trajectory. We also announced Prasad Sankaran as the new head of our Software and Platform Engineering Practice. Prasad, joined us yesterday from Bain, where he was a Senior Vice President in the firm’s Enterprise Technology Global Practice. Prior to that, he spent 25 years in senior leadership roles with Accenture. Both announcements speak highly of our ability to attract world-class talent and support two key strategic areas for Cognizant, the Americas region and leading enterprise technology transformation.
Before passing the call to Jan, I would like to stress that while we’re in a period of economic uncertainty, the entire leadership team knows we must execute better on things that we can control including optimizing resources globally and getting the right mix on an offshore in a dynamic demand environment. We will continue to focus on and hone our operational discipline, which is intended to enable us to adapt quickly to demand changes. While we are in uncertain macroeconomic environment, we remain highly optimistic on the IT services market and our opportunity within it. Finally, following sustained progress in reducing voluntary resignation rates, we expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter, allowing us to repay the client conversations from fulfillment to innovation, strategic transformation and growth.
With that, I will turn the call over to Jan, who will cover the details of our quarter and our fourth quarter financial outlook before we take your questions.
Jan Siegmund — Chief Financial Officer
Thank you, Brian, and good afternoon, everyone. Q3 revenue was below our guidance range, driven primarily by lower billable headcount in North America. Higher-than-expected attrition coupled with strong competition for talent in North America made it challenging for us to maintain required staffing levels to meet our revenue forecast. An uncertain macroeconomic backdrop, led to pockets of bookings and revenue weaknesses in certain industries. The weaker-than-expected revenue performance was offset by commercial discipline, the benefit from the depreciation of the Indian rupee and SG&A leverage, which resulted in sequential and year-over-year, operating margin expansion.
Now moving on to the details for the quarter. Q3 revenue was $4.9 billion, representing an increase of 2.4% year-over-year or 5.6% in constant currency. Year-over-year growth includes approximately 40 basis points of growth from our acquisitions and a negative 60 basis points impact from the sale of Samlink, completed at the beginning of this year. In Q3, digital revenue as reported grew 7% year-over-year or 11% in constant currency. Digital represented approximately 51% of total revenue for the quarter, up 2 points from the prior year period. Our slower digital revenue growth reflected the expected lower inorganic contribution, we discussed last quarter and the lower billable headcount in North America mentioned earlier. These factors and the softening demand environment also contributed to a bookings performance below our expectations. Q3 bookings declined 2% year-over-year and represented an in-period book-to-bill of approximately 1 times. This resulted in a trailing 12 months bookings of $23.1 billion and the book-to-bill of approximately 1.2 times, unchanged from Q2.
Brian has already taken us through the segment performance, but I will spend a minute discussing several trends we are seeing, emerge across our two largest segments. Within financial services, banking revenue growth slowed this quarter. This portfolio has a higher mix of time and material business, which we believe is more vulnerable to changes in the economic outlook of our clients. Additionally, mortgage clients have been impacted by rising interest rates, which has a negative impact on our results. These headwinds were offset by continued growth within insurance, particularly within Property and Casualty, where we are seeing good traction in both middle market and large global carriers. We’re continuing to invest and strengthen our banking and financial services portfolio to improve the revenue trajectory over the medium-term.
Within Health Science, our growth was again driven by demand for digital services among pharmaceutical companies. Healthcare payer growth was consistent with last quarter and we have seen the ramp-up of integration-related services following the software product growth earlier this year. However, the healthcare industry has not been immune to pressures driven by the macro uncertainty as we have seen softer demand, both across healthcare payer and life sciences. Clients are slowing discretionary spending as they await greater clarity on the economy and navigate an increasingly complex regulatory environment. Continuing with the year-over-year revenue growth in constant currency, from From a geographic perspective in Q3, North America revenue grew 4%, growth was led by CMT and Health Sciences. Our global growth markets were GGM, which consists of all revenue outside of North America, grew approximately 10%, including a negative 220 basis points impact from the sale of Samlink. Growth was again led by the UK, up 19%, which had a strong double digit growth within financial services including public sector clients.
Now, moving on to margins. In Q3, our GAAP and adjusted operating margins were 16.4%, as there were no non-GAAP adjustments in the quarter. On a year-over-year basis, GAAP operating margin increased by 100 basis points and adjusted operating margin increased by 60 basis points. Year-over-year margin expansion was primarily driven by SG&A leverage, while gross margin pressure from increased compensation costs was partially offset by delivering efficiencies and disciplined pricing. We also experienced a meaningful tailwind from the depreciation of the Indian rupee, delivering an approximate 80 basis points of benefit, net of hedges year-over-year. Our GAAP tax rate in the quarter was 22.5%, which included the benefit from a discrete tax item in the quarter. Adjusted tax rate in the quarter was 25.2%. Q3 diluted GAAP EPS was a $1.22 and Q3 adjusted EPS was $1.17, up 18% and 10% year-over-year, respectively.
Now turning to the balance sheet, we ended the quarter with cash and short-term investments of $2.7 billion with net cash of $2.1 billion. Free cash flow in Q3 was $953 million, representing approximately 150% of net income, in line with our expectation. This brings year-to-date free cash flow to $1.6 billion or 92% of net income. DSO of 74 days was flat sequentially and an increased by two days year-over-year. During the quarter, we repurchased 5 million shares for $300 million, under our share repurchase program and returned $141 million to shareholders through our regular dividends. This brings total capital return to shareholders through share repurchases and dividends to approximately $1.5 billion through the first nine months of 2022.
Turning to our forward outlook, we are revising our full year guidance downward, which reflects headwinds from currency, lower North America billable headcount, which we expect to take several quarters to improve and softer than expected bookings growth. Offsetting these factors are several tailwinds including sustained reductions in resignations globally and our expectation for lower attrition in the fourth quarter. For Q4, we expect revenue in the range of $4.72 billion to $4.77 billion, representing year-over-year decline of 0.2% to 1.2% or growth of 2% to 3% in constant currency. Our guidance assumes currency will have a negative 320 basis points impact as well as an inorganic contribution of approximately 30 basis points. Together these factors contributed to our revised full-year revenue guidance of approximately $19.3 billion, representing year-over-year growth of approximately 4.5% or 7% in constant currency. This assumes approximately 100 basis points of inorganic contribution.
Our reported revenue outlook now assumes a negative 260 basis points of impact from currency versus 220 basis points previously. This compares to our prior full year revenue guidance of $19.7 billion to $19.9 billion, which represented growth of 6.3% to 7.3% or 8.5% to 9.5% in constant currency. We expect our full year operating margin to be approximately 15.6%, the low-end of our prior range. This implies Q4 adjusted operating margin of around 15.3% at the midpoint of our EPS range. Reflecting the reduced revenue outlook and the annual merit cycle for most employees that is effective October 1. Our full year outlook assumes interest income of approximately $50 million versus $35 million previously, reflecting higher interest rates. We still expect average shares outstanding of approximately $519 million unchanged. Our tax guidance of 24% to 25% is unchanged.
Finally, our revised full year adjusted EPS guidance of $4.43 to $4.46, represents growth of approximately 7% to 8%. This compares to prior guidance of $4.51 to $4.57. Our longer term capital allocation framework remains unchanged. We are pleased to announce our agreement to acquire the professional services and application management practices of OneSource Virtual yesterday and we expect our acquisition pipeline to remain active. Our share repurchase assumptions for the full year is unchanged at $1.2 billion. As always, this remains subject to-market conditions and other factors.
In support of our balanced capital deployment strategy, the Board has also approved a $2 billion increase in our share repurchase authorization, which brings our total remaining authorization to over $3 billion as of today. We are also still targeting full year free-cash flow conversion of approximately 100% of net income. Before opening the call for questions,p I want to reinforce that the leadership team is focused on addressing the operational challenges, impacting our recent results. We are also closely monitoring macroeconomic factors to help enable us to quickly respond to changes in the demand environment. Longer term we remain confident in our market opportunity.
With that, we will open the call for your questions.
Questions and Answers:
Operator
[Operator Instructions] And the first question comes from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.
Lisa Ellis — MoffettNathanson — Analyst
Hi. Good morning, or good afternoon, guys, I guess. I’ll start on the attrition point that you’ve raised that seems to I guess be the root — the root cause of some of the challenges you’re having both on revenue and on bookings. In the past you’ve focused a lot on the initiatives you’re undertaking in India related to attrition and haven’t spent as much time on the dynamics of what’s going on in North America, can you just elaborate a bit on what exactly is happening in North America? As recent, have you pinpointed like specifically what’s causing the elevated attrition and maybe elaborate a bit on the timeframe and the steps you’re taking to address it? Thank you.
Brian Humphries — Chief Executive Officer
Hey, Lisa, it’s Brian. So look at a global level, I would say we’re doing similar things in North America as we’re doing in India. Clearly, on a weighted basis, India has the biggest impact on our attrition historically, so we put in inordinate efforts and war rooms in place over there. And frankly, in India as well as in North America and our international business in Europe and Asia, we have seen resignation have come down pretty much for four to five months in a row now, so those efforts are kicking in and those efforts are broad-based including the obvious compensation elements as we announced — we just announced our second merit increase now in six months, but on top of comp, there is merits, there is career path progression, promotion, process overall, learning and development initiatives, etc. And so the North-America efforts are somewhat similar to what we’re doing globally.
I think in North America, we’ve gone through a pretty material Visa, I would say a process in the last three years as we reduce Visa dependency. But obviously in a tough market environment, where digital skills at a premium, we’ve been suffering attrition in North America and by definition obviously going out as fast as we can to recruit talent simultaneously. And those factors coupled with what’s effectively happened across the industry and ours was no difference. A shift to nearshore and offshore during COVID has led us to have a — I would say suboptimal level of onshore delivery resources in North America. And it catches up quickly with you because of the order of magnitude of the difference in terms of revenue and margin dollars per head in North America versus in India. So it’s a question of rebalancing that. We have major initiatives underway, operational rigor behind it. We had hoped to make more progress in the quarter, it’s a little slower than we anticipated, but we’re putting a lot of effort behind that to correct it and it’s all of the factors we mentioned above.
At a global level, we’re expecting, I would say significant voluntary attrition reductions now going into the fourth quarter. The goodness of the last four months will kick in Q4.
Lisa Ellis — MoffettNathanson — Analyst
Got it. Okay. And then, I know last quarter, you had commented on kind of the relationship between the attrition challenges and bookings, and you were taking some actions to sort of address the bookings issues — kind of that linkage. I think you are having challenges that through yourself, people perhaps were concerned, they wouldn’t be able to staff a project or something, and so we’re delaying it or right, but then I guess persisted into this quarter, so can you just also…
Brian Humphries — Chief Executive Officer
Yeah, look I mean let me start with the facts first on bookings, they were down 2% year-over-year, a little below what we had hoped for the quarter to be honest. It is important, I’d say to recognize the tough comparison in the second half of last year with 20% plus bookings growth. So that leads to even in quarter bookings book-to-bill of 1.0 and under trailing 12-month basis still a 1.2. So healthy enough, although frankly we lost some deals in the quarter that slipped out quarters and that’s I think somewhat indicative of an uncertain macroeconomic demand environments.
We’ve seen lengthening purchase cycles and then clients being a little bit more judicious in their approval of expenses. But, Lisa specific density, impact of attrition by definition as people were dialoging with clients around price increases, which has been one of our success stories, helping margin as well as addressing fulfillment challenges. It’s made the commercial team, somewhat hesitant, I think to go to full mild to get the commercial momentum as strong as it needs to be in terms of increasing pipeline and accelerating bookings.
The good news now is we’re quite vocal with our team in terms of what we’re seeing from a resignation point of view and therefore what they should be anticipating in Q4 in terms of attrition levels, which as I said will be meaningfully down from Q3 voluntary attrition levels. So I think we’re starting now to get confidence in the commercial team that the effort we put in place around attrition and resignation will kick in. Of course, this is happening in a period where as I said on the call, we’re a little more concerned now than we were three months ago in terms of the macro demand environment. So that’s probably been a bigger impact on bookings this quarter than previously, the whole concern amongst the C-Suite as they are scrutinizing their spends and it’s not clear to me that we’ll see a budget flush at the end of this year and we’ll will certainly anticipate furloughs at the end of this year relative to last year. So it remains to be seen and we factored that into our guidance.
Lisa Ellis — MoffettNathanson — Analyst
Okay. Thank you. Thanks a lot.
Operator
The next question is from the line of Rod Bourgeois with DeepDive Equity. Please proceed with your question.
Rod Bourgeois — DeepDive Equity — Analyst
Yes, guys. Hey, so you have 4% constant currency growth in North America and essentially 10% outside of North America. So I wanted to ask how you feel about your progress and outlook in ramping your international revenue presence? And also ask, if your efforts in doing that are detracting from your efforts in North America or perhaps it’s just that you’re talent challenges are more pronounced in North America, some color on that would be really helpful?
Brian Humphries — Chief Executive Officer
I’ll start with the international business, which we expect, very good things in the coming years there. We’ve refreshed some leadership over there. We’ve added with the seniority of the people we’ve recruited. We’ve added M&A to complement our capabilities. And examples of that include the, UK, Germany and Australia. And I’ve spent a large part of the — the last year going around the world and I’m pretty optimistic around or potential internationally. So Rod, optimistic, but I don’t think it’s really taken away from the North American focused.
In North America and Canada [Phonetic], there has been a shift more to offshore and nearshore. We are building our capabilities in Canada, but currently a shift towards India has happened. Our net headcount has materially increased in India on a year-over-year basis and we have to — we get the balance right. Three years ago, we were over Visa dependent in North America, we’ve been pretty disciplined around that as we are trying to land that at the right level.
Candidly, what’s been happening in a COVID world is that consulates internationally are just not functioning at the same capacity as before, so we gone a little bit too far and that’s actually a good news by the way in terms of reversing that for our attrition, because that has hurt our attrition in the last two, three years as people saw that opportunity be less available than previously. But now that we’re turning the top on a little bit to rebalance, subjective to the capacity of consulates that will not only help onshore headcount, but actually help morale and I believe attrition in India as well. So, I think the US onshore situation is independent of the international positivity that I have and I’m very optimistic around our potential there in the years to come.
Rod Bourgeois — DeepDive Equity — Analyst
Great. Hey, and let me ask a follow-up about the cloud services market. We definitely see some changes happening in that market. So, I just wanted to ask about what you’re seeing in that market, particularly your competitive position there and to what extent some of the recent macro challenges are having an impact in cloud or maybe not so much, it would be great to help to hear some thoughts on the cloud market?
Brian Humphries — Chief Executive Officer
First of all, I’ll actually call out Prasad Sankaran, who joined us yesterday. He’s got a very strong background in cloud as well. So he and I spent a great deal of time talking about where that market is going and ironically in the Client Advisory Board last week, it was a great topic of discussion amongst certain sustaining clients too.
I would say our position with some of the packaged application players like Salesforce, Workday is stronger than it’s been for many, many years and so we feel good about the progress there and yesterday’s announcements of OneSource Virtual will continue to strengthen our Workday practice. Vis-a-vis the hyperscalers, it’s kind of interesting, I’m seeing clients clearly accelerate their path to the cloud within the same vein, Rod, I see growing dialog amongst clients around how to optimize your position in the cloud as in lifting and shifting your current suite of applications with every factoring or in another way transforming ahead of the transition.
It doesn’t necessarily always give them the efficiencies that they would have anticipated, so there is more dialog around how to optimize your cloud journey. And so, what you’ll see us do and continue to do is stand up capabilities and resources behind that, both in the cloud practice as well as in our consulting business as we anticipate cloud modernization journeys or tech much more generally, you will see us at more advisory capabilities there as well.
Rod Bourgeois — DeepDive Equity — Analyst
Excellent. Thank you.
Operator
Our next question is from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.
Ashwin Shirvaikar — Citi — Analyst
Thank you. Could you talk about what you’re seeing in digital, especially since you mentioned slowing discretionary spend? Is that — is that more of a company-specific positional thing because other companies have spoken too, have not yet mentioned anything specific with regards to digital specifically slowing down?
Brian Humphries — Chief Executive Officer
Hey, Ashwin. So look, firstly on the broader macroeconomic environment, I’d say it’s difficult to be conclusive or dogmatic at this moment in time. It certainly what we would term uncertain macroeconomic environment and the outlook is a little more concerning now than it was three months ago, if you go back to my comments back then. We are seeing spend been reduced lower priority projects or those with longer ROI periods and even discretionary cloud projects as I referenced in my prepared remarks are selectively being reduced. So we still have a lot of confidence in our digital capabilities.
Our portfolio is now 51% digital, up 2 points year-over-year. But some of the challenges we talked about the macro demand picture as well as the US onshore situation are equally applicable to this and then as you know yesterday’s announcement of a acquisition, the first acquisition we’ve done this year. So we haven’t had the tailwind at our digital momentum that we had last year from the series of acquisitions that we did. That being said, as Jan pointed out, we are committed to our framework of extending our portfolio in line with our digital strategy and we have a series of deals in the pipeline as we speak. So I’d expect that ultimately overtime to get back in a more normal course for us, but I don’t believe that all digital projects will be immune from the current economic climate.
Jan Siegmund — Chief Financial Officer
And maybe in addition, Ashwin to give you, a little bit more of a framework on the M&A side, our full year guidance assumes approximately 100 basis points of contribution from M&A, approximately half of what we typically see. So if you multiply that types of share of digital revenues, you’ll see there is an impact on just dramatically on the lack of M&A fueling digital growth. And then aside from the demand — market demand that Brian mentioned obviously in North America, we are also affected by our fulfillment challenges that we experienced in the quarter, which, proportionately affected our non-digital business as well, as our digital business, so it’s a combination of all these factors together.
Ashwin Shirvaikar — Citi — Analyst
Got it. And what does this lower exit growth rate for the year mean in terms of achieving sort of your medium-term targets? And I completely appreciate the high-level of macro uncertainty that we have, but any granular thoughts, how you are planning for next year would be greatly helpful?
Brian Humphries — Chief Executive Officer
Yeah, so that — somehow I thought this question would come up. So, number one is, we feel our growth framework that we discussed with you and basically pretty much a year ago, a little bit more than a year ago is still intact overall. Maybe a few pointers with the growth for framework sees our revenue growth, which you are referring to really in light of CAGR over the three-year time horizon. So it’s. compounding growth and obviously we didn’t quite anticipate at that point the economic uncertainty that we’re facing today, but we think the framework from our perspective is intact. And we will give guidance obviously for next year in our fourth quarter earnings call in January.
Ashwin Shirvaikar — Citi — Analyst
Thank you.
Operator
The next question is from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Bryan Keane — Deutsche Bank — Analyst
Hi, guys, just on the fulfillment challenges, I know that kind of was an issue last quarter and it seems like it got pushed into this quarter and then it caused you to miss the guidance that and maybe the economy a little bit. Just trying to figure out, as the fourth quarter is — how comfortable are you with those numbers or could we still have some of this fulfillment issues lingering that could push us into lowering expectations again?
Jan Siegmund — Chief Financial Officer
Yeah. Maybe I’ll start with it and then I’ll let Brian jump on top of it. If we think about the mix as Brian mentioned and as we talked in our call, had a — had a number of factors in it and fulfillment is fairly logical. So we we misjudged or we had a little bit faster improvement in the third quarter of our attrition anticipated. And so about that, that miss on attrition improvement made about a third of our miss, relative to our expectations. And then we have a number of initiatives in place to accelerate the hiring and inflow and particularly in North America of initiative and that represents approximately also a third of our miss to revenue guidance.
And here, we obviously saw as the North American challenge to grow our headcount and initiatives in place from funding our — and ensuring we have full capacity of hiring in place to — to focusing on the full fledge of resources available to us including the utilization of subcontractors and accelerating Visa travel and increasing employee referral program. So we have a set of initiatives in place. These initiatives have shown initial momentum, but they were scaling slower than we anticipated. So we have now a trajectory and we think we have appropriately risk adjusted our new revenue guidance. So we’re keenly interested to meet our own expectations and so yes, we have assumed an improvement in attrition levels that we can see, but we also see now the trajectories of some of these initiatives clearer than we had in the third quarter.
Brian Humphries — Chief Executive Officer
Yeah, and just to build on that, the resignation visibility we have of course differs in India versus North America, because the — the notification period in India is slightly different. But I mentioned on last quarter’s earnings call, had July resignation that come down and through August and September, it was a different plateau for those three months viz-a-viz the prior six months. Certainly if you look at India and indeed in North America and Europe, and in the first month of this quarter it’s continued to be low, in fact lower than the prior three months. So we feel Bryan at this stage very, very confident about that. And Jan rightly pointed out, we wanted a good guidance that we want to make sure we can hit, so we were in the right zone.
Bryan Keane — Deutsche Bank — Analyst
Got it. And then did the fulfillment challenges, especially in North America, will that be fixed by the time we get into the first quarter or could it linger into the first half of the year?
Brian Humphries — Chief Executive Officer
We’re aiming, as I’ve said in my prepared remarks — we’re working through that as quickly as we can and we aim to make progress in Q4, but. I think it’ll still be a headwind in Q4. We hope by the time we come out of Q4 and we clearly give you an update on that in next quarter’s earnings call. We hope to walk into Q1 with clear progress by the time we get through Q1.
Bryan Keane — Deutsche Bank — Analyst
Okay. All right. Thanks so much.
Operator
The next question is in the line of Bryan Bergin with Cowen. Please proceed with your question.
Zack Ajzenman — Cowen — Analyst
Hi, thanks. This is Zack Ajzenman [Phonetic] on for Bryan. Another one on the fulfillment issues. Could you give us some real-time insight into the nature of conversations that you’re having with clients here? And kind of just thinking about all the rebranding and repositioning that the company has done in recent years, what are you doing to reassure clients that you are digital transformation partner of choice?
Brian Humphries — Chief Executive Officer
We actually see different stories to be honest, Bryan across different industries in terms of our evolution towards digital, even banking where we are, let’s say, more heavily exposed to time and materials. We have been able to increase our digital mix and we’ve got some good proof points with certain clients, but more fundamentally the journey we’ve been on is to extend the portfolio, which we’ve been successfully doing in recent years and yesterday’s announcement is another example of that to try to complement that portfolio than with a client-facing team that is more consultative in nature has anybody who has overseen a sales force and knows that is a multi-year journey. So we’re — we’re on route, but it takes time to get there. To complement then, that’s more consultative sales force with a more industry-aligned consulting business and so that’s the space we should continue to watch in Cognizant because we will invest behind that and we got strong leaders in that capacity these days.
And then just to make sure that there is increasing brand awareness around the capabilities we have and references and case studies that we can showcase. Last weekend, the client advisory board was very good example of certain clients not really being truly aware of the extent of our portfolio. So we have to do a better job marketing that ourselves, but I would say brand awareness of the company is up. Digital awareness is increasing, but it’s it’s a multi-year journey and we’re in the middle of all of that. And it starts with our client-facing teams and our delivery capabilities and our partnerships. And I certainly see in dialog with some of our key packaged application partners like Salesforce and SAP, growing recognition that we are getting stronger, but as ever, a few years ago we were quite low in terms of digital mix and we’ve been working our way back up to 50%, which were pleased across, but there is more work to do.
Zack Ajzenman — Cowen — Analyst
Got it. That’s helpful. And just a follow-up, the forward-looking attrition commentary is encouraging. You’ve been vocal about a new normal for attrition being higher than pre-COVID levels. Perhaps you can share updated views here and the timeline for when Cognizant is more in a steady state mode as it relates to attrition?
Brian Humphries — Chief Executive Officer
I think, it’s very hard to really be precise on that, Bryan [Phonetic]. There’s just so much going on in today’s world. We’ve gone through a period of pretty significant disconnect between demand supply on key labor — key digital skills. We’re going through a hybrid work environment as a society where arguably people are less entrenched to engage with companies as they work remotely. And now we’ve gone through a very different scenario that the economy is uncertain, slowing and people are — recruiters have been laid off across the globe. We’re seeing in certain companies, people are being laid off and so the market is suddenly perhaps less hot than it was previously and that can also have an immediate impact on attrition trends and voluntary resignations in particular.
So we will see where — what our find is on level over time. I’m encouraged by our specific actions that we’ve taken. Jan and I also built that into our financial plan, so we have notwithstanding a slowing, I would say labor markets, we know that we want to invest on a sustainable basis in our employees in the years to come and we factored that into a multi-year financial framework and that will help increase our relative compensation vis-a-vis peers and simultaneously, we’re doing everything we can around training, development and career path and employee value proposition. So, I’m not sure when, it normalizes to a new norm. I still believe there will be a new normal. We won’t go back to historical levels and I think as a society at large, we’ll probably see attrition slow across the industry in Q4 and beyond, but time will tell.
Zack Ajzenman — Cowen — Analyst
Helpful, thanks.
Operator
The next question is from the line of James Faucette with Morgan Stanley. Please proceed with your question.
James Faucette — Morgan Stanley — Analyst
Hey, good afternoon, and thanks a lot for all the color and time this afternoon. In terms of skills and looking at kind of — as as that relates to fulfillment, where are you seeing the most challenges in terms of finding the appropriate people and — and getting them into your fulfillment capabilities right now? And how are you thinking about the pyramid itself as it relates to solving for that? And, I’m just wondering how that then impacts the way that you think about financial guidance? It’s kind of a complicated question, but hopefully that’s clear.
Brian Humphries — Chief Executive Officer
Yeah, I mean, it’s actually quite nuanced because, first of all our headcount has materially increased year-over-year, but most of the increase has been in India. So by definition then you have different bill rates. Within India, the lower levels of our pyramid are actually factor [Phonetic] for lack of a better word than they were in the last few years and that’s because if you go back, this year we’re bringing in about 40,000 graduates, 45,000, last year at 33,000, the year before about 17,000, the year before less than 10,000.
We had been too narrow as attributed previously. We’ve done a good job, I think addressing that and that’s afforded us the opportunity to have more upward momentum in the company, which is one of the many factors that has helped us actually drive margin expansion year-over-year and sequentially in both Q2 and Q3. But James the fundamental elements in terms of the demand/supply economic imbalance on key digital skills was heavily related to skills related to all the hyperscalers. Things like sales force, angular, full stack engineers, I mean, they’ve been probably the hardest parts of the market and there’s being very irrational behavior, I would argue over the last 18 months in terms of comp increases that went hand-in-glove with that. That’s where we’ve seen the hardest challenges in terms of the absolute attrition. It’s fundamentally been in India and at the lower levels of the pyramid.
James Faucette — Morgan Stanley — Analyst
Got it. And then, I guess kind of a somewhat related question, but looking more specifically at the P&L and margin impact, can you help talk us through the impacts and mechanics of merit cycle changes? Are those accelerating or are they going to be permanent? I guess, should we expect two cycles a year and — and just trying to make sure that we’re contemplating that — how that flows through the actual P&L appropriately?
Jan Siegmund — Chief Financial Officer
Yeah, that’s maybe for me to answer. So effectively our acceleration of our typical merit cycle that we’re just experiencing in the fourth quarter and moving it up to the second quarter has really — the main reason for it is to better align our HR processes, about evaluation processes and reward processes together. So it a benefit from a talent management perspective to have our merit increase in the second quarter. So that’s really a very important driver of it and second important driver is obviously because we’re accelerating the second — this merit cycle by two quarters, we will incur a one-time shift of compensation by two merit increase about two quarters forward.
And that’s going to be a one-time effect only because staying with an annual merit increase process, so in 2024, the normal cycle will be four quarters later again in the second quarter of the — of the year. So we are capturing basically, I think here an opportunity to improve our talent management processes, but also allows — digital also allows us to drive a faster compensation increase to our associates, which we think is timely because we really do want to be focused on attrition and we anticipate that, that will have a positive impact on attrition. Even though hard to measure, but, we think it will send a positive signal of our commitment to our associates to be competitive on compensation and benefits.
James Faucette — Morgan Stanley — Analyst
Thank you.
Operator
Our next question is from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your questions.
Tien-Tsin Huang — JPMorgan — Analyst
Thanks so much. As always, just thinking about the knock-on effects of the federal pyramid plus the attrition, just — is there an impact there on your ability to capture price or even be competitive on pursuing new work bookings that sort of thing just trying to understand sort of the collateral impact if you’re seeing some of that?
Jan Siegmund — Chief Financial Officer
So what we — maybe I’ll talk a little bit about our overall — maybe gross margin development, kind of what you’re focusing on Tien-Tsin here is, we did see obviously a decline, but I think the relative performance overall typically the industry has been relatively good. And so a few factors I want to point out, when we talk about pricing, I think we need to kind of in particular now that we have been added for a little while, I think about them as a regular contractually increased pricing increases with our clients, but also a discipline to price our business appropriately in the market and with both of these things, we have seen slow start in the fiscal year and now we have seen steady improvement and compounding impact of those initiatives. So that hasn’t been getting better and has helped us on the relative gross margin performance.
Also the shift to the — in our pyramid has been positive. We have been able to a large degree offset — the impact of comp and benefit increases by streamlining our pyramid and focusing on a slimmer permit as Brian mentioned, that paired with promotion opportunities, which are positive for our associates. I think we’ll have over the next couple of years as that is still scaling and maturing a positive impact on how we price and how we win deals. So we’re feeling I think good about — we’re feeling good about the improvements we’re making of how we manage the business opportunity. It’s thoughtful process, it allows us actually also to make our strategic best moving forward. I think margin profile is in good shape and that should offer us opportunities to make our strategic bets where we want to go and go fast revenues on a much more solid base that we are today.
Brian Humphries — Chief Executive Officer
Yeah, the only thing, I would add there Tien-Tsin is, I don’t think we’re doing anything except correcting what wasn’t overly narrow pyramid back in the day and on the contrary I think because we had somewhat cancelled the college intake in prior years, it led us having folks further up the pyramid doing work at lower billable rates than we’re optimal. So I think what we’ve done in India as appropriate and it’s more in line with industry rates based on dialog I have with those from other companies, where we have to do a better job on-campus and college graduates, I think it’s both onshore in Europe and Asia as well as in North America, where we are not adequately getting after the market opportunity there. It’s obviously — there is a war on talent still, we have to look at vocational colleges, not just the classic places as well and that scenario focus we’ll have.
Fortunately, with Ravi coming on board in North America, he has run and play there previously, which we will obviously aim to replicate over year and that can help our pyramid. But generally I feel good about our skills in our pyramid. I think we corrected something that was miscued and I don’t want anybody to get off the call worried about our skillset in our pyramid, where we got very talented employees and I feel good about that.
Tien-Tsin Huang — JPMorgan — Analyst
Great. Thank you both for the complete answer there. Just quickly — if you don’t mind a quick follow-up, just on the capital allocation front, have to ask capital allocation question, just with the buyback up the authorization here, just your appetite to buyback stock, I know you talked about the acquisition just announced, but just thinking about buyback here at this point in the cycle? Thanks.
Jan Siegmund — Chief Financial Officer
Yeah, for this fiscal year we gave you basically our anticipated number of $1.2 billion and you see in over the last few quarters as we have been lacking M&A activities that we basically we redirected excess cash to return to our shareholders. That’s the general philosophy that we been following. There is no intend to build up cash on our balance sheet and so that flexibility is in the model. We are seeing a good pipeline though of our M&A activity, so it’s — we announced the deal, but from compared to last quarter, we really have moved the needle forward and now business development activity with very talented team and we see also I think a little bit more realistic behavior in the market relative to acquisition opportunities. So I think for us the goal would be to get back to normal to the capital allocation framework that we have been talking about for a long time, that is going to be the mindset for us going forward.
Tien-Tsin Huang — JPMorgan — Analyst
Thank you.
Jan Siegmund — Chief Financial Officer
Thank you.
Operator
Next question is from the line of Darrin Peller with Wolfe Research. Please proceed with your question.
Darrin Peller — Wolfe Research — Analyst
Hey. Thanks, guys. Can we maybe go into a little bit more detail on the verticals specifically and just help us understand, maybe starting with financial services, but any other one you think makes sense. Really what you believe is the driving force on the change in outlook, whether it’s number one, macro and just pure simple demand in bookings? Number two, headcount — your billable headcount available? And number three, is there anything else, that’s maybe like tech — either tech stack or capability or competitive dynamics? I’m just really trying to parse out what’s driving the story and what can be improved on your own doing versus macro?
Brian Humphries — Chief Executive Officer
Yeah, look, it’s a good question. I mean I’ll start with the two bigger ones, financial services, which is about 31% of the company, it grew by 1.6 points in constant currency, but that was impacted by the exit of the Samlink business, which was previously disclosed to the tune of 180 basis points to normalize, let’s say, 3.4 points [Phonetic] of growth and that’s below industry. We’ve got a lot of work to do there as we’ve cited previously. There is a slowdown in certain segments there, we touched upon in the prepared remarks the mortgage segment in particular. I’m also seeing some of the C-suite there talking about, let’s say tightening their belts as they go into the fourth quarter and beyond. So, I think that will be a tougher sector for others as well. But fundamentally our bigger issue there that we’re evolving from is not just the folks we have in front of those clients, but also how to clients think of us. We very often train them to think versus a provider of resources.
I’m pleased to say that our digital mix in financial services is improving and our staff — our time and material mix is not improving enough, yet, so we have to get that balance right in the period to come. Insurance, we’re doing better than banking and that’s obviously in banking area we got to go fix. In health services, we feel very good about our position on a relative basis or competitive basis in both payer provider as well as life sciences that’s one of our core franchises, I would say as a company. The business grew about 5.5% in constant currency year-over-year. It’s 29% of our business, so it’s catching-up on financial services overall. We’ve had good momentum TriZetto business in the last few years. So I feel pretty good about our relative position there. And then if I talked about the other two portions of the business, where we’ve actually historically in the last two years, three years been growing double digits.
CMT is a good success story of ours. We’ve had good client acquisition there. Good constant-currency growth, products and resources, I think we have a lot of room to continue to do well there because our penetration of large accounts is lower there than it is as an example in Life Science,s if you think about or indeed the payor business where we are heavily penetrated into the major players. So that’s kind of how we think about the framework, but the factors we touched upon today, elevated attrition across the industry and Cognizant within that permeated across all industry segments and indeed the US onshore situation permeated across all as well. So nothing specific to either of those.
Darrin Peller — Wolfe Research — Analyst
All right. Thanks. Just one quick follow-up on the margin side. It did come in well and I mean your guidance is relatively unchanged also for margins. So just thinking about that in terms of going forward a little more than just fourth quarter, it would seem that if wage inflation calms down a bit, you should be able to maintain that level, is that — is that a fair assumption?
Jan Siegmund — Chief Financial Officer
Well, I have to say the standard answer in the third quarter, we gave guidance in the fourth quarter, but I did mention that we feel our overall framework, our multi-year framework is intact and that didn’t refer only to the revenue, but it refers also to our margin expectations. So that’s kind of as far as I want to go for today. When you analyze the results on the margin, I think it’s important to consider a number of factors. We have driven the margin expansion by having SG&A control and discipline. So it helped us to drive and leverage that SG&A as the company grew. We had also meaningful support from the depreciation of the rupee in our business and then I talked already about the impact that our actions had on gross margin. Gross margin was under pressure, but I think we had a lot of activity that moderated what could have been a bigger effect on gross margin even so.
You’ve heard me in the third quarter and continue — in second quarter and now continues in the third quarter, we feel, we have a relatively — we have a good process in place to — to balance that businessout. And so our focus is to maintain that discipline obviously and then really accelerated revenue growth, that is main focus that we’re driving on, that’s our biggest opportunity and use this — the margin profile as a great foundation for that.
Darrin Peller — Wolfe Research — Analyst
Okay. That’s helpful. Thanks, Brian. Thanks, Jan.
Operator
Thank you. This will conclude today’s Q&A portion of the call.
Brian Humphries — Chief Executive Officer
Great. Thank you all for joining. I look forward to catching up next quarter.
Operator
[Operator Closing Remarks]