David Nelson -- VP, IR and Treasurer Francisco D'Souza -- President and CEO Gordon Coburn -- Chief Financial and Operating Officer

Joseph Vafi -- Jefferies & Company Jason Kupferberg -- UBS Rod Bourgeois -- Sanford C. Bernstein & Co. Tien-Tsin Huang -- JPMorgan Chase Julio Quinteros -- Goldman Sachs Joseph Foresi -- Janney Montgomery Scott George Price -- Stifel Nicolaus Ed Caso -- Wells Fargo Securities Brian Keane -- Credit Suisse Nabil Elsheshai -- Pacific Crest Securities Glenn Greene -- Oppenheimer James Friedman -- Susquehanna Financial Group

Ladies and gentlemen, welcome to the Cognizant Technology Solutions second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions). Thank you. I would now like to turn the call over to David Nelson, Vice President of Investor Relations and Treasurer of Cognizant. Please go ahead, sir.

Thank you, Stephanie, and good morning everyone. By now, you should have received a copy of the Company's second quarter 2009 earnings release. If you have not, a copy is available on our web site, cognizant.com. The speakers we have on today's call are Francisco D'Souza, President and Chief Executive Officer; and Gordon Coburn, Chief Financial and Operating Officer of Cognizant. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's earnings release and other filings with the SEC. I'd now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco. Francisco D’Souza: Thanks, David, and good morning, everyone. Thanks for joining us today. We're pleased to report solid second quarter results. Our revenues grew 13% year over year or 4% quarter over quarter, ahead of our previous guidance. Our operating margin was strong as was our cash flow during the quarter. If we look in terms of business segment, as we expected, BFS was essentially flat from Q1, and our other business segments showed solid growth. During the quarter, we continue to hire talent, adding a net of over 400 employees. The economic environment has created a great opportunity for us to hire extremely talented individuals and we're taking full advantage of that opportunity. Based on our performance and outlook, we've increased our guidance to at least $3.14 billion in revenue for the full year 2009 or at least 11.5% over last year. This is an increase of $40 million over our previous guidance. At this point, we have solid visibility to this revenue for the full year. To give you some color on the demand environment, while we believe that the macro economic climate will continue to remain weak for the rest of the year, our results indicate that we are seeing stabilized demand for global, IT and business services as clients move forward with their scheduled projects, especially those that streamline their businesses and reduce operational costs. Also, while IT budgets look firm for the remainder of the year, we're being cautious and we're not assuming any surge or back-end recovery of demand this fiscal year as we've seen in some prior years. Our visibility and confidence in the demand environment has strengthened over the past two months. And our pipeline is solid with a bias towards services focused on cost containment and operational effectiveness. I'd like to now spend a few minutes to touch on our business model, which is a key reason for our strong growth and profitability. As part of that, I'll cover our recently announced relationship with Invensys, which marks Cognizant entry into the engineering and R&D outsourcing market, a new opportunity which we expect to deliver revenue growth over the long-term. During Q2, we marked 11 years as a public company. Over that period, as a result of continual reinvestments in our business, we've navigated significant shifts in the technology landscape and expanded successfully to new geographic markets and industry verticals. We've continued to grow each year in the face of two economic slowdowns and have competed successfully against the largest and most sophisticated firms in the world. I dwell on the past only to make the point that our business model has stood the test of time and proven to be agile, resilient, and defensible, as reflected by this quarter's results. We've delivered consistent operating margins and revenue growth that has been above our peer set, demonstrating a level of constancy that our investors rely on. Equally, our approach to reinvestment has allowed us to continually strengthen the business and differentiate the company from our peers, allowing us to respond rapidly to evolving client and market needs. Perhaps the strongest validation of our business model and the resulting capabilities comes from the fact that we serve some of the largest and most successful clients in the world, which is a point of great pride at Cognizant. And today our model is even more relevant and appropriate to clients as it uniquely positions Cognizant at the intersection of the many changes our clients are experiencing. As we look forward, we do so with a sense of long-term optimism and confidence for three primary reasons. The first reason is that the markets we serve today are significantly larger than those we addressed a decade ago, representing a solid opportunity for further growth. For example, according to a recent NASSCOM McKenzie report, by 2020, the IT infrastructure services market is expected to be a $65 billion to $70 billion market opportunity. Business process outsourcing or business services is projected to be a $340 billion to $360 billion market opportunity, and finally engineering and R&D services, which I'll speak about in a minute in the context of Invensys, is projected to be worth $200 billion to $220 billion by 2020. The second reason for our long-term optimism and confidence is that our ongoing investments have given us the strength and capabilities to capitalize on opportunities such as those I just spoke about. We've created a solid platform for growth. First, we have one of the best client management engines in the industry. In today's environment, when clients are experiencing significant change, this capability is more important than ever. We've also invested in building our consulting practice as a critical part of this client management engine to focus on building trusted advisor relationships with clients. In Q2, our Business Consulting group delivered exceptionally strong performance, including several key client wins. Our focus has allowed us to build market leading positions in key industries such as healthcare and financial services and in several key service offerings like testing, enterprise analytics, and ERP. And the final reason for our long-term optimism and confidence is that we are simply not standing still. Throughout this recession, we have continued to invest aggressively to ensure that we will emerge in a stronger position than when we entered. We're investing in emerging geographies. We're especially encouraged by the Asia-Pacific region, where we have seen good results. As you may know, over the last year or so, we bolstered our leadership ranks with hires across Australia, Japan, China, and most recently India, and the Middle East. We are investing in technology. A part of this technology investment is Cognizant 2.0, which is a fully integrated global delivery platform based on Web 2.0 technology. With Cognizant 2.0, we've solved some of the most difficult challenges of real-time project management and knowledge management amongst teams of highly distributed professionals around the globe. Cognizant 2.0 deployment has resulted in enhanced satisfaction and productivity levels amongst our clients, partners, and employees alike. It enables Cognizant associates worldwide to collaborate virtually and deliver significant time to market cost and IT transformational value to clients. Of particular importance, Cognizant 2.0 is increasingly becoming a key differentiator for Cognizant in new wins such as it was in the case of Invensys. And finally, we're investing in emerging high growth service lines, which are underpenetrated areas of opportunity. In addition to analytics, IT infrastructure services, and business process outsourcing that I've spoken about on past calls, our Invensys relationship positions us to capitalize on the engineering services and R&D markets, a new services opportunity for Cognizant. To give you some background on Invensys, Invensys is a global provider of technology and controls for industrial automation and rail transportation. The operations management division of Invensys provides manufacturing automation solutions that enable industrial customers to improve efficiency, profitability, and safety. Some 200,000 manufacturing facilities across the world use Invensys products on the shop floor to run their plant operations. We were selected by the operations management group of Invensys to be their global development partner for applications in the areas of manufacturing, engineering, enterprise manufacturing intelligence, and operations management. This relationship will provide both companies with great opportunities to expand, innovate, and tap into new markets. As part of Cognizant's investment, we will create a world-class industrial automation lab in Hyderabad. We have made employment offers to over 400 Invensys professionals in India. This team will become the core of Cognizant's newly formed engineering and manufacturing solutions practice, which we expect to have direct relevance to existing and new clients in various industries, including manufacturing, life sciences, and consumer goods. As I mentioned earlier, NASSCOM projects engineering and R&D services to be a $200 billion to $220 billion opportunity by 2020. We expect to create multiple new revenue streams, from participating in core product development with Invensys to providing industrial automation, product implementation, systems integration, and support services. Also being part of the core development team of Invensys and developing complementary industry specific solutions for process, discrete and hybrid manufacturers, which we can use to penetrate new clients in industry segments as well as to sell to existing clients. We see this alliance as representative of Cognizant's forward-looking pursuit of innovation and reinvestment in our business. Now I'll turn the call over to Gordon, who will walk you through our financial and operating results in greater detail, following which we'll take your questions. Gordon?

Thank you, Francisco, and good morning to everyone. I would like to provide some additional information on the second quarter and then discuss our financial expectations for the third quarter as well as full year. During the second quarter, our financial services segment, which includes our practices in insurance, banking, and transaction processing, stabilized as anticipated. It was up fractionally on a sequential basis and represented 42.8% of revenue for the quarter. Within the core banking component of the segment, we experienced low single digit sequential growth in North America and Continental Europe as our clients stabilized and they focused on leveraging a broader range of our services, including some rebound in discretionary projects. This was partially offset by a sequential decline in revenue from two of our UK banking clients that are going through consolidations. We believe that these accounts have now stabilized. Healthcare performed quite well during the quarter, growing 7.9% sequentially and representing 26.3% of revenues. There were several factors driving the strength in healthcare. First, pressure on medical cost containment is resulting in increased interest in our data warehousing, business intelligence, and data analytic capabilities as payers seek to better understand the underlying drivers of their medical costs. Second, clients began assessment work with us to understand the impact of implementation of future industry transaction standards and code sets, in particular, ICD-10 and the 5010 code set. Third, we had two instances where our clients engaged us to begin modifying their systems to support new end customers with unique requirements not addressed by their current systems. And finally, many of our newer healthcare clients reached the inflection point for ramping up application management work with us. Retail manufacturing logistics was also strong, growing 7.6% sequentially and representing over 17% of revenues for the quarter. We are particularly pleased with the strength we are seeing in our retail sector, where many of our clients are early in their transition to global delivery and see the weak economy as a catalyst to accelerate these programs for development and maintenance services as well as business products as outsourcing and IT infrastructure services. The remaining 13.8% of our revenue came primarily from other service oriented industries of communication, media, and high technology, which grew 5% sequentially. For the quarter, application management represents 55% of revenues and grew 19% year over year. Application development was 45% of revenues and grew 7% year over year. Both maintenance and development grew 4% sequentially. This is the first time since the fourth quarter of 2007 that we saw development grow at the same pace as maintenance on a sequential basis. During the quarter, 80% of revenue came from clients in North America. Europe was approximately 18% of the total and just over 2% of the revenue came from the Asia-Pacific, Middle East, and South American markets. Currency movement positively impacted European revenue growth in the second quarter versus Q1 of 2009 by approximately $6 million, due primarily to the strengthening of the British pound and euro since the early part of this year. However, compared to the second quarter of 2008, the movement of the European currencies negatively impacted growth by close to $22 million. We had a gross addition of 48 new customers during the second quarter. We closed the quarter with 569 active customers, a net increase of 9. During the quarter, the number of accounts, which we considered to be strategic and have the potential to ramp up to at least $5 million to more than $50 million in annual revenue increased by 5. This brings our total number of strategic clients to 134. We are seeing a trend towards our newer strategic customers embracing a wider range of Cognizant's services at an earlier stage in the relationship. Turning to costs, on a GAAP basis, cost revenues exclusive of depreciation and amortization increased 13.8% for the quarter, as compared to the second quarter of 2008. Second quarter cost of revenues included approximately $3.9 million of stock-based compensation expense as well as $192,000 of stock-based Indian fringe benefit tax expense, which we recovered from employees. The increase in cost of revenues is primarily due to additional technical staff, both onsite and offshore, required to support our revenue growth. We increased our technical staff by more than 350 during the quarter and by over 4,300 compared to June of 2008. We ended the quarter with approximately 59,800 technical staff. Second quarter SG&A depreciation and amortization expense was $191.6 million on a GAAP basis, up from $184.9 million in the second quarter of last year. GAAP SG&A expense in the second quarter included approximately $4.4 million of stock-based compensation expense and almost $1.1 million of stock-based Indian fringe benefit taxes. GAAP operating income for the quarter increased approximately 26.7% to $151.7 million from $119.7 million in the second quarter of 2008 on a non-GAAP basis, which excludes the impact of $8.4 million of stock-based compensation expense and $1.3 million of stock-based Indian fringe benefit tax, operating income in the second quarter was $161.3 million, up 18.6% from last year. Our GAAP operating margin was 19.5% for the quarter, and our non-GAAP operating margin, which excludes stock-based compensation expense and fringe benefits taxes, was 20.8% for the quarter, slightly above our target range of 19% to 20%. The margin over performance was driven by stronger than expected revenue in the latter part of the quarter, the higher number of billing days in Q2, our continued improvements in utilization, partially offset by an increase in our variable compensation expense. The average rate for the Rupee was 48.7 in the second quarter of 2009 versus 49.6 in the first quarter and 41.6 in the second quarter of last year. $90 million of Rupee operating expense cash flow hedges settled during the second quarter at an average rate of 49.2. This resulted in a gain of approximately $2 million, which was recognized in operating expenses. For the remaining two quarters of 2009, we have outstanding forward contract hedges for $178 million of rupee operating expenses at an average rate of 49.6. In addition, we have $390 million of rupee operating expense hedges in place for 2010, also at an average rate of 49.6. Interest income for the second quarter was $2.6 million compared to $4.9 million in the second quarter of 2008 and $2.5 million in the first quarter of this year. Interest income declined substantially year-over-year due to a dramatic decline in short-term interest rates compared to last year. We had a $14.1 million net foreign exchange gain during the quarter related to our balance sheet, primarily due to the strengthening of the British pound, euro and rupee versus the U.S. dollar, partially offset by a loss on our rupee balance sheet hedges. This gain was recognized in non-operating income. The remaining $700,000 of non-operating income resulted from mark-to-market requirements related to our auction rate securities portfolio. Our GAAP tax rate for the second quarter was 16.5%. We expect the full year 2009 tax rate to be approximately 16.5%. As previously discussed, certain of our tax holidays are currently scheduled to end in March 2010. However, the Indian government has proposed to extend these holidays through March 2011. This change has been approved by the India Parliament and is awaiting signature of the President. Our diluted share count for the second quarter was 299.3 million shares. Late in the fourth quarter of 2008, we announced a $50 million share repurchase program. We did not repurchase any shares during the second quarter. Turning to the balance sheet, our balance sheet remained very healthy. We finished the quarter with just over $1.1 billion of cash, short-term, and long-term investments, up approximately $175 million from the end of Q1. During the second quarter, operating activities generated approximately $151 million of cash. Financing activities generated approximately $12.4 million of cash, comprised of the proceeds of option exercises and related tax benefits as well as our employee stock purchase program. We spent approximately $9.6 million for capital expenditures during the quarter. In addition, we benefited from $15 million in currency translation adjustments. For full year 2009, we expect to spend between $130 million and $150 million on capital expenditures. This is a reduction from our original expectations due to the timing of our new facilities and infrastructure requirements. Based on our $635.9 million balance at the end of June, we finished the quarter with a DSO including unbilled receivables of 74.5 days, compared to 77.4 days for the same period of 2008, and up from 72.5 days in the first quarter of this year. The unbilled portion of our receivables balance was approximately $82.8 million at the end of the second quarter, an increase of $9.5 million compared to Q1. Approximately 61% of our June 30th unbilled balance was already billed in the month of July. During the second quarter, 30% of our revenues came from fixed price contracts, up from 29.1% in the first quarter of 2009 and up from 25.7% in the second quarter of last year. When we look at the mix by solution type during the second quarter, 32% of our development revenue and 28% of our maintenance revenue came from fixed price contracts. We are pleased with the continued trend of increase in the percentage of our revenues coming from fixed price contracts. Turning to headcount, at the end of the quarter, our worldwide headcount, including both technical professionals and support staff, totaled approximately 64,100. This represents a net increase of over 400 people during the quarter. Annualized turnover, including both voluntary and involuntary, was approximately 11.3% during the quarter. Second quarter attrition represented a 370 basis point improvement versus the second quarter of last year. As discussed previously, our strategy is to increase the Company's utilization levels due to scale economies and historical heavy overinvestment in bench resources. Q2 results show a payoff on the strategy. Offshore utilization was 66% during the quarter. Offshore utilization, excluding recent college graduates who are in our training program, was approximately 70%. On-site utilization was approximately 88% during the quarter. At the end of the second quarter, we had over 2,300 unbilled people remaining in our training program. I'd now like to comment on our growth expectations for the third quarter of 2009 and the full year. As Francisco mentioned earlier, although we are remaining cautious due to the ongoing global economic recession, our visibility and confidence in the demand environment has strengthened over the past two months. For the third quarter of 2009, we are projecting revenue of at least $800 million. We have significant revenue visibility due to our high level of recurring revenue and the long-term nature of our customer relationships. In fact, today we have customer commitments for well over 90% of third quarter revenue guidance. For full year 2009, we continue to expect industry-leading revenue growth. Based on current conditions and client indications, we are increasing our prior revenue guidance and expect revenue of at least $3.14 billion. This represents growth of at least 11.5% compared to our prior guidance of at least 10%. We have reaccelerated our investment spending and expect our operating margins for the remainder of this year to be in our historical target range of 19% to 20% before the impact of equity-based compensation expense and related taxes. Therefore, we are currently comfortable with our ability to deliver in Q3 GAAP EPS at $0.40 and non-GAAP EPS of $0.44, which excludes estimated stock-based compensation expense of $0.04. This guidance includes the anticipation of a Q3 share count of approximately 302 million shares at a tax rate of 16.5%. This guidance excludes any future non-operating foreign exchange gains or losses. For the full year 2009, based on current business trends, we are increasing our GAAP EPS guidance to at least $1.66, and full year non-GAAP EPS guidance to at least $1.80, excluding $0.14 of estimated full-year stock-based compensation expense and Q1 recoverable stock-based Indian fringe benefit tax expenses. This guidance anticipates a full-year share count of approximately 301 million shares. This guidance excludes any future non-operating foreign exchange gains or losses. Lastly, the proposed India government budget for the current fiscal year includes the elimination of the stock-based fringe benefit tax effective April 1, 2009. The budget has been approved by the Parliament and is awaiting signature of the President. Our EPS guidance assumes the elimination of stock-based fringe benefit tax passes into law during the third quarter. With that, operator, we'd now like to open the call for questions.

(Operator instructions). Your first question comes from the line of Joseph Vafi with Jefferies & Co. Francisco D’Souza: Hi, Joe. Joseph Vafi -- Jefferies & Co.: Hi, gentlemen. Good morning. Great results. I thought maybe we could talk a little bit development growth catching up here with the maintenance growth and maybe drill down a little bit more exactly what you're seeing more project starts beginning in '10? Was there anything lumpy with maybe a large development effort or was it more broad-based? Francisco D’Souza: Joe, let me try to give you some color on that. First I'll say that, as you know; Q2 was really the first quarter where, in my opinion, we saw a more or less a full quarter of stable budgets. Q1 clients were still going through the budget process. So in Q2, we had a full quarter of stable budgets with most of our clients. And so to the extent that development spending was baked into their plans, Q2 has the full impact of that. There are no specific one-time or lumpiness in the numbers that's actually pretty broad-based across the portfolio. And if you look at it by industry segment, it is being driven by specific initiatives in different segments. For example, Gordon talked about healthcare and some of the work that they need to do to transition to the new industry standards like ICD10 and 5010. So those are some of the things that are driving development by industry. Joseph Vafi -- Jefferies & Co.: Okay. That's helpful. And then just maybe one more here on the operating margin. Sounds like you obviously came in a little higher based on the reasons you say, Gordon, and it sounds like you're going to bring it back down with investment spending. Should we be looking at that as more hiring and bringing utilization down or maybe other initiatives, and how should we be thinking about utilization in Q3?

There will be several components of it, Joe. Will there be more hiring in Q3? The answer is yes, both at the technical level, but much more importantly at the senior consulting and client facing levels, where we're significantly accelerating that investment with the belief that in this downturn, we're going to use this opportunity to further differentiate Cognizant in the marketplace, and the ways to do that is through investment spending. We're accelerating our movement into additional geographies certain from a market facing standpoint and in certain cases from a delivery standpoint. So it's a fairly widespread investment, where we think now is the time to go out and hire some great people available in the market and an opportunity to position ourselves well for the future. Joseph Vafi -- Jefferies & Co.: Okay. Great. I'll turn it over. Great job. Thanks.

Your next question comes from the line of Jason Kupferberg with UBS. Jason Kupferberg -- UBS: Thanks, and good morning, gentlemen. Francisco D’Souza: Hi, Jason. Jason Kupferberg -- UBS: Wanted to ask a question on financial services. Sounds like second quarter came in about as you expected, and I know previously you suggested that BFSI would flatten out and stay pretty flat on a sequential basis from the second quarter through the fourth quarter of '09. Is there any uptick in your expectations there, maybe based on a little bit of revival of spending on the app development side? Or is the guidance raise really more applicable to trends in the other verticals?

We're certainly feeling better about financial services than we were just two months ago. I think you classified it right. We are seeing some revival there. We continue to have risk adjustments in our forecast, particularly in the financial services area, in cases of additional shoot or draw. But based on what our field is saying, we think there is some growth opportunity; though we have risk adjusted some of that out just to be prudent. Jason Kupferberg -- UBS: Okay. And for app development, I think previously you guys were thinking of '09 as being sort of a flattish growth year for app development, and clearly did a bit better than that in the second quarter. That's where the upside versus our model was. You now think about app development growing more like mid single digit for this year, and in your mind, is the increase in guidance for this year really tied primarily to some of the modest improvements in app development as opposed to material changes on the app management side of the business?

We don't want to guide specifically to maintenance or development-specific numbers, but certainly at end of Q2, development was stronger than we anticipated. Once again we're being cautious in our guidance on development, particularly, as we get to the fourth quarter. Will people have extra money to spend, or will they run short of money? So that's still open to question. So we're taking a cautious view on that. But certainly, we are pleased that there is some life in development. But I want to be clear. We're also continuing to see strength in application management. So both sides of the house seem to be doing okay right now. Jason Kupferberg -- UBS: And just one last question, whenever we come out of this global recession, what do you think is a realistic top-line growth rate for the offshore IT services industry just based on its current size and penetration rates?

It's just too difficult to hazard a guess. And you've already seen it; you're seeing a bifurcation in the market among one group of players versus the other. What will the overall growth in the industry be? I'm not sure. But what I do know is penetration rates are still fairly low, especially because of the expanding range of services that clients want to leverage deliverability for. So that gives us optimism that there is certainly a growth opportunity for Cognizant in the future. Jason Kupferberg -- UBS: Makes sense. Thanks, guys.

Your next question comes from the line of Rod Bourgeois with Sanford C. Bernstein and Co. Rod Bourgeois -- Sanford C. Bernstein & Co.: Yes, guys. Nice to see the growth. I'm wondering if you can give us an idea of how much fallout occurred from the two UK clients that struggled in the quarter or can you specify what your overall revenue growth would have been in the quarter, excluding the impact of those two financial services clients?

It would not have been material to the overall business. Within the core banking business, which is obviously a small piece of the revenue, it held down growth rates a little bit. Bu, when you look at the overall business, it was not material. Rod Bourgeois -- Sanford C. Bernstein & Co.: Okay. Great. And then when you look at the financial services vertical that gets a lot of attention in this industry, can you comment on whether you think the worst of downward scoping and repricing challenges in that vertical are largely behind us at this point? Francisco D’Souza: I think that's a fair characterization, Rod. At this point, we think that from Q2 levels, we don't expect significant downward pricing pressure through the rest of this year, across the business, financial services and otherwise. Rod Bourgeois -- Sanford C. Bernstein & Co.: So is your guidance still that your pricing overall will be down this year less than 5%?

It will be down in the low single digits, for the year, somewhere between 3% or 5%. But that's pretty much all in the system already now. Rod Bourgeois -- Sanford C. Bernstein & Co.: All right. So that's based on year-to-date activities, and you're expecting stabilization from here on out for the year?

There will be a little noise give or take, but we're not expecting any material movement sequentially. Rod Bourgeois -- Sanford C. Bernstein & Co.: Okay. Great. And then extending on that, can you characterize demand for new deals in Europe and the UK versus the U.S. at this point? In other words, is Europe somewhat lagging the US in terms of new deal demand coming back? Francisco D’Souza: We're not really seeing that, Rod. Our pipeline is pretty balanced between the U.S. and Europe, the UK and the Continent specifically, the pipelines in all these geographies are healthy. So we're actually not seeing significant differences between the geographies, except as Gordon said specific client situations where they're going through the consolidations and things like that, where it results in some lumpiness. Rod Bourgeois -- Sanford C. Bernstein & Co.: Is that because you're relatively new in Europe or is that because the market in Europe seems to have trends that are similar to what's happening in the U.S. from a recovery standpoint? Francisco D’Souza: I think it's actually neither of the above. It's just the fact that frankly, here different dynamics going on. In the U.S., you have somewhat of a recovery in demand for our services. Remember that in Europe, particularly on the continent, IT offshoring and BPO is relatively underpenetrated. So through this slowdown, moving work offshore is actually somewhat of a lower hanging fruit than it is in other parts of the world, where offshoring is more penetrated. So that's, in my opinion, on the continent in particular, that's what sustained demand through the slowdown.

Thanks Rod. Rod Bourgeois -- Sanford C. Bernstein & Co.: Great. Thank you.

Your next question comes from the line of Tien-Tsin Huang with JPMorgan Chase.

Hi, Tien-Tsin. Tien-Tsin Huang -- JPMorgan Chase: Hi, good morning. Thanks. Great results. I just wanted to clarify, is there a way to think about what the biggest factor to the upside surprise in revenues and your greater confidence in the visibility in outlook? Was it simply budgets closing or just pent-up demand coming through or some share gains coming out? Any thoughts would be appreciated. Francisco D’Souza: I think it's across the board. It's all of the above, all of the things you mentioned. When I look at the results in the second quarter, and as we look forward for the rest of the year, the strength is really pretty broad-based. As Gordon said in his comments, across industry sectors, financial services was flat or modestly up in the second quarter, but the other industry segments all grew very, very nicely. When you look at development spending, or discretionary spending, that came back in the second quarter. Again, that was fairly broad-based across the industry groups and across the geographies. Some of the investment areas that we have been making in the past are starting to pay off. In particular, we saw very strong growth on a sequential basis, analytics, BPO, and IT infrastructure services all did extremely well. So I think it's a combination of all these things. It goes back to the strength of the business model. I think the smartest thing we did over the slowdown was to think about continuing to invest and make sure we didn't take our eye off the investment ball, and I think you're starting to see that pay off now. Tien-Tsin Huang -- JPMorgan Chase: For sure. So, I guess, on that same topic, last year you made some significant hires on the relationship managers and the sales front. How long does it typically take for that to translate into real revenue? Are we seeing it now, or is this more of a 2010 benefit? Francisco D’Souza: No. We have a pretty good engine to bring those folks on and get them productive. So typically, you figure it takes six month or so for them to come up to speed. So, early 2009 investments would be starting to show results in the back half of this year. Folks we hired at the end of last year would already be showing results at this point. Tien-Tsin Huang -- JPMorgan Chase: Okay. Good. Two more quick ones. Invensys, sounds like a good add there. How is that going to ramp over the balance of this year into next year? And also for Gordon, just use of cash, no buy-backs this quarter, any change in thinking on use of cash? Thanks.

Sure. I'll start with the Invensys program. Late in the third quarter, about 400 people will transfer from Invensys to us, and then we would expect some growth off that, the exact pace of which will play out. That's sort of the first wave, and the major wave comes late in the third quarter. In terms of use of cash, we didn't buy any shares in the third quarter. We have about 1.1 billion. We want to continue to have a healthy balance sheet. Clearly we continue to look for small tuck-under acquisitions. So our strategy has not materially changed on the use of cash. Tien-Tsin Huang -- JPMorgan Chase: Great. Thanks. Well, done. Francisco D’Souza: Thanks.

Your next question comes from the line of Julio Quinteros with Goldman Sachs. Julio Quinteros -- Goldman Sachs: Hey, guys. Great. On the back-half implications for the revenue growth, can you walk through -- what looks like on a year over year basis, the revenue is a little lower than where you guys are tracking on the first half of the year. Any specifics around that? I was toggling back and forth between the calls. I might have missed it earlier.

No. We didn't hit it earlier. Our at lease [ph] guidance mathematically translates into a slower sequential growth. Part of that was billing days. In Q2 there was a big increase in billing days. It was up slightly in Q3 and then down in Q4. Part of it is we mentioned -- we continued to carry contingency in there, particularly for the fourth quarter, in the event that the customer slowed things down late in the year. So part of that is driven by contingency as well. Julio Quinteros -- Goldman Sachs: Okay. Great. And then thinking about the pace of spending, I don't know if Francisco or Gordon, you guys can comment on this, but if you think about how much spending you've seen in 1H versus 2H 2009, is there a sense there has been significant underspending that can accelerate into the back half of the year beyond the normal seasonality, or are we trending more or less in line with what we're going to see for the rest of the year? In other words, that wouldn't be a big uptick other than normal seasonality into the fourth quarter? Francisco D’Souza: I did cover that in my script. What I said was that IT budgets looked firm for the remainder of the year. I don't anticipate -- unless there's a big reason in the economy for it, I don't anticipate volatility in IT budgets for the rest of the year. But just from a prudence and caution standpoint, we are not assuming any surge or back-end recovery of demand this year like we've seen in prior years. I don't think there's a case to say that we're going to see a surge in the second half. I think it will continue along. Budgets are where they are. I don't see there will be a catalyst for a surge. Julio Quinteros -- Goldman Sachs: Okay. And then just lastly, from a competitive perspective, what are you guys doing differently to grow at this point in the cycle versus your other tier one Indian IT competitors? Can you characterize it down to one or two things that you think are making a difference in terms of your growth profile right now? Francisco D’Souza: I think it boils down to investing. We're continuing to invest aggressively through the downturn. We're hiring people. We added over 400 people in the second quarter. We've talked to you about the investments we're making in sales and marketing and business development. We're expanding into new geographies. Our businesses in the rest of the world outside of Europe and North America grew 65% year over year in the second quarter. So the investments we're making in Asia and now more recently in the Middle East and so on are starting to pay-off. So we made a conscious decision as we entered the economic slowdown to try at all costs to protect investment through this. We felt that was the right thing to do, not to cut to the bone, and not to cut stuff that would impact us in the long run, and I think that's the single differentiator. All those investments are broad-based. They're across service lines, across geographies, across people. But if you ask me for one thing, it's the fact we continue to invest through the period. Julio Quinteros -- Goldman Sachs: Great. Thanks, guys. Good luck. Francisco D’Souza: Thanks.

Your next question comes from the line of Joseph Foresi with Janney Montgomery. Francisco D’Souza: Hi, Joe. Joseph Foresi -- Janney Montgomery Scott: Hi. Just one quick question here, guys. I want to ask you about the volume and pricing. What should we be looking at to indicate growth is going to be accelerating through the downturn?

I think it really depends on several things. One, certainly there's pent-up demand from a project side. So the question is what do budgets look like as we come out of the downturn, which as Francisco said, we don't expect to happen this year. And then, as people start releasing those pent-up projects and efforts, was off -- what was global delivery, an increasing resource for them. So essentially to what degree did the recession turn out to be a catalyst for the customers to leverage global delivery? That's the big question mark here. So far we think the answer is probably quite positive for us, but we have to get into the recovery to know for sewer. Joseph Foresi -- Janney Montgomery Scott: Okay. So to clarify, I think what I was looking for is, we talked a lot about stability. Is there one particular metric or piece of the puzzle that you guys would look at in saying, okay, that's probably a good indication things are accelerating, whether that be an increase in volume, an increase in headcount or any of the above or even an increase in development. Is there something we should be looking at to indicate, okay, we finished stability and are moving forward?

I wish the answer to that is yes, but the answer is there is no one indicator, and you can't even take one period of a trend to be sure. It's something that evolves over time. Joseph Foresi -- Janney Montgomery Scott: Great. And just one last question. I don't know if you covered this in the opening remarks, but have you given any color on sort of what the tax rate and maybe the effects of FBTR [ph] for 2010?

Assuming that the budget is signed into law by the president, which extends the STP holiday to 2011, that will result in a 2010 tax rate being relatively constant with 2009. Joseph Foresi -- Janney Montgomery Scott: Okay. Thanks.

Your next question comes from the line of George Price with Stifel Nicolaus. George Price -- Stifel Nicolaus: Hi. Thanks very much. Nice results. Couple of questions here. First, on the hiring and resumption of hiring again, I guess I wanted to see how much of that is just timing within the year versus what that says about your view into the second half of the year, even into next year?

It's a combination of both. When we look at the freshers, a lot of them will come on in the second half of this year, because we pushed the start dates more towards the second half of the year. However, we have resumed lateral hiring, and that's a result of obviously this year shaping up better than we originally anticipated as evidenced by the fact we took guidance up. So a combination of some timing due to the pressures and a clear resumption on lateral hiring. Francisco D’Souza: And keep in mind that utilization was very healthy in the second quarter despite the hiring. It wasn't hiring to the bench. This was hiring into projects. George Price -- Stifel Nicolaus: Yes. Absolutely. On the discretionary side, do you expect application development will be up quarter over quarter? Again in line or even possibly ahead of application maintenance in the third quarter?

I'd be hesitant to guide based on type of service. Clearly we were pleased that for the first time since the end of 2007, development grew in line with maintenance. Will it do that again in Q3? It's too early to know. George Price -- Stifel Nicolaus: Okay. Well, is the assumption that the fringe benefit tax, Gordon, goes away in the third quarter?

Yes, absolutely. George Price -- Stifel Nicolaus: Okay. So it goes away in the third quarter. What was the GAAP benefit, the GAAP raise benefit or the GAAP EPS benefit from the fringe benefit tax going away? Did that have an impact?

On the GAAP, it would have. So if you look at the full year, non-GAAP, so which excludes all that stuff, went up by $0.09. We were at $1.71, went up to $1.80. Gap went up by, I think, $0.13 if I got it right. So there was a couple assumed for FBT in the second half of the year. But if you focus on the non-GAAP, that we took up by $0.09 from prior guidance. George Price -- Stifel Nicolaus: Okay. Great. Thanks very much.

Thanks.

Your next question comes from Ed Caso with Wells Fargo Securities. Ed Caso -- Wells Fargo Securities: Good morning. Congratulations. My question is on your India business, India to India. If you could sort of scope out its size, growth rates and are you putting together a different business model to tackle that market because you don't really have the costs arbitraged? Francisco D’Souza: It's Frank. The business is still relatively small given that we are probably only 18 months or so into that journey. We have, give or take, 10 clients or so in the India market and we are in some senses approaching it differently, but what we're doing is going after the India market based on the industry verticals where we're strong and that have a significant representation in India. So we're going after financial services in those markets where Cognizant has a unique perspective. We're focusing on domain expertise and bringing intellectual arbitrage to those engagements as opposed to focusing as you said on labor arbitrage, which doesn't exist in India to India context. That's actually quite a common approach in markets like India and China, and we expect that as we go into the markets of Latin America, we'll see a similar entry strategy. Ed Caso -- Wells Fargo Securities: The fixed price percentage continues to climb and is meaningfully higher than a year ago. At what point do you start fixed pricing things that maybe aren't quite comfortable fixed pricing, and have there been any, assuming you're using a flatter pyramid for that kind of work, any client satisfaction issues?

Let me start with the second part. I would not assume it means it's a flatter pyramid. We're going to staff the stuff and price it at fixed bid based on what we think is the optimal pyramid. Obviously, the advantage of fixed prices as we get productivity gains and we are more efficient doing things, we're able to keep a portion of the gain versus if it's T&M, it all goes to the client. We're slowly moving up our percentage of revenue coming from fixed price, and the reason we're doing slowly is to avoid the issues that you're highlighting. We think we have the right estimating tools in place, and so far it's all played out very well. Ed Caso -- Wells Fargo Securities: And last question. Several of your competitors particularly in these emerging markets have products where they wrap together intellectual property and your booking license fees. Is that part of your model going forward? Francisco D’Souza: It's not a major part of the model going forward. We are clearly looking at, particularly in our BPO business, the opportunity to bundle underlying platform technology with business services to create bundled platform offerings for clients to serve specific business process areas. But I don't anticipate that, that business model will involve significant traditional license fees rather what we'll do there is bundle the platform and the business service together and charge clients transaction-based pricing. Ed Caso -- Wells Fargo Securities: Thank you.

Your next question comes from Brian Keane with Credit Suisse. Brian Keane -- Credit Suisse: Hi. Good morning and congratulations on the better than expected results.

Thanks, Brian. Brian Keane -- Credit Suisse: My question just has to do with, you guys were talking about last two months feeling a little bit better. So, I guess, maybe Gordon, can you help us understand what changed from May moving into June and July?

We keep referring, earlier in the last part of the quarter, stability has returned. And I think as stability returned for our clients and that the sentiment that their business, they now understand what's happening in their business, they're able to start making decisions about both reallocating work to global delivery so they can get more done with the same dollars and putting their toe back in the water with some discretionary work. So I think that stability in the clients mind resulted in actual strength in terms of what they want to do with Cognizant. Brian Keane -- Credit Suisse: I assume sales cycles are still long, but maybe improved a little bit? And then maybe you can talk about cancellation and deferrals, have those subsided as well?

We never saw a change in new customer sales cycles. What was hurting us for a little while was once we won customers, the rate at which they would ramp up. But in terms of winning the deals, those have actually remained pretty constant, and we expect those to continue to remain constant. Obviously what's happening is the ramp-up rates have improved a little bit. Francisco D’Souza: As has the uptake for new services, so what we're seeing is, as Gordon mentioned in his comments, we're seeing that new clients tend to ramp up on the newer service offerings like BPO and IT infrastructure services more quickly. So we're seeing broader footprints more quickly within the clients. Brian Keane -- Credit Suisse: Frank, just expanding on that, if you're taking or if your guys are successful in cross-selling more services, do you guys feel like you're taking market share then from some of the bigger multinationals like the Accentures and the IBMs of the world? Francisco D’Souza: I think it's clearly to some extent. These are big underpenetrated markets, and I think there's plenty of opportunity. And most of the time, on the service offerings, particularly on BPO and IT infrastructure services, more than taking market share away from any specific competitor, we're taking share away from the in-house operations. Brian Keane -- Credit Suisse: Okay. Thanks a lot.

Your next question comes from Nabil Elsheshai with Pacific Crest Securities. Nabil Elsheshai -- Pacific Crest Securities: Couple questions real quick. Thanks for taking my call. Francisco D’Souza: Sure. Nabil Elsheshai -- Pacific Crest Securities: On the verticals, there were obviously smaller numbers, but were there any other verticals in the U.S. particularly that were maybe lagging in terms of the recovery so far? Francisco D’Souza: We continue to see -- within the broad business segments, I would point to the technology sector which is within our other group. That was still sluggish in the second quarter. And within the retail manufacturing and logistics group, I think manufacturing was a little sluggish. But I think the manufacturing group with our win in Invensys and so on will start to show results over the course of the fourth quarter and going into next year as well. Nabil Elsheshai -- Pacific Crest Securities: Okay. And the large packet software guys have some fairly major product releases coming. Have you gotten any feedback that there could be an upgrade cycle or implementation cycle coming over the next couple of years? Francisco D’Souza: It's too early to tell. Where and how that plays out in terms of how clients adopt new major releases of software when they come into the market really depends on the state of the economy and how clients are thinking about spending at that point in time. So I think it's too early to try to make a call in terms of when big software upgrades are going to happen based on these releases. Nabil Elsheshai -- Pacific Crest Securities: And last question, it seems like every day, there's somebody else selling a captive. Is that something would that be potentially part of your strategy to expand the BPO offering? Francisco D’Souza: I think we look at captives with the same screen that we look at acquisitions in general. We're looking for opportunities to expand the circle of services. So certainly BPO falls into that category, IP infrastructure services and so on and so forth. We're looking for geographic expansion and then we're looking for specific capabilities. So any of those we would certainly entertain and we look at captives in the same way we look at any other acquisition. Nabil Elsheshai -- Pacific Crest Securities: Okay. Great. Thank you.

Your next question comes from Glenn Greene with Oppenheimer. Glenn Greene -- Oppenheimer: Hey, good morning, guys. Francisco D’Souza: Hi. Glenn Greene -- Oppenheimer: I think the first question is on the operating margins, question probably for Gordon. At this point, we're sort of four quarters in a row you're above your target. I guess, what we'd love to get some color on in this quarter, was part of it due to lower wage pressure? How much was due to lower investment? So just some color and commentary on the upside in this quarter and the last few quarters. Are we at a new higher profitability level?

Let me answer second part of the question. Clearly not. We have no desire to be above 20%. We actually don't view it as a good thing. What would happen, second quarter revenue came in stronger than anticipated and I didn't want spending to get ahead of where revenue might have tracked to. But we are fully committed to investing for the long-term. This market is still young, and we want to make sure we differentiate ourselves from our competitors as much as possible. And it's paying off. We're growing faster, we're growing materially faster, you're hearing a different message coming from us in terms of the margin dynamics. We think that's the result of the investment we're making. A lot of it is the revenues come in a bit stronger. We had favorability from the rupee. Obviously wage inflation has been a little bit less than anticipated. But I would not want you to have the expectation that on a sustained basis we want to be above 20%. Glenn Greene -- Oppenheimer: Okay. Thought you might say that. And then, Francisco, the venture with Invensys, I'm wondering if there are other similar type ventures that may be out there, other verticals in particular that may be of interest for you? Francisco D’Souza: The relationship we built with Invensys is fantastic. In some sense it's similar to what we did with T-Systems about a year or so ago. We really like these kinds of alliances. We think that there are often opportunities to create situations where two plus two is greater than four. And certainly in the case of T-Systems and in the case of Invensys, we believe that to be true. Invensys allows us to not just extend the manufacturing vertical where we had a historical presence and continue to look for ways to deepen, but then entering the much broader market of engineering and R&D services, which is a relatively young offshoring opportunity, but one which NASSCOM is projecting to be very, very large, and is applicable not just to our manufacturing clients, but other segments where Cognizant is strong. So life sciences, for example is an example where the opportunity for engineering and R&D services is significant. So we are very excited about the Invensys relationship, and I think with T-systems and Invensys, we have somewhat of a track record of doing these. So we'll continue to look for them in places where it makes sense, but we'll only do them in places where two plus two is greater than four and we can create significant value for clients. Glenn Greene -- Oppenheimer: Great. Thank you very much.

Your last question comes from James Friedman with Susquehanna Financial Group. James Friedman -- Susquehanna Financial Group: Hi, it's Jamie Friedman. I want to ask Gordon about the CapEx reduction. Is that a reflection of a decision in the company to rent rather than build or is there something more profound going on?

You're right. Nothing profound going on other than utilization has come up, and we ended up leasing a facility or two which changed the timing of the buildings and stuff. So purely a question of timing of construction. James Friedman -- Susquehanna Financial Group: Okay. And then you had mentioned a number of billing days, which I know was a factor in the Q2. I had thought you had mentioned in your commentary that the Q3 had a higher number of billing days, is that even than the Q2 does?

Q3 has 1% more billing days. But I'd be little cautious with that. You also have a lot of vacation days in Q3. James Friedman -- Susquehanna Financial Group: Okay. And then my last thing is, you were going quick there when you talked about the unbilled revenue, Gordon. I think you had said, the part I was asking about was the amount that had been billed subsequent to the quarter, if you could repeat that?

Sure. Of our unbilled balance at the end of June, 61% of it billed in the month of July. James Friedman -- Susquehanna Financial Group: Okay. So is that a lot?

It's pretty much in line with what we're seeing in other quarters. So the point that is this is stuff that churns pretty quickly. James Friedman -- Susquehanna Financial Group: Got it. Okay. Thanks for taking my questions.

Thank you. Francisco D’Souza: Thanks, everyone. Let me just close then by saying that we remain confident in our business model and our ability to capture and create additional opportunities. I think this quarter showed and we're going to continue to focus on the twin goals of managing our business prudently while continuing to invest aggressively in the business to ensure continuity of growth. This focus has been and will continue to be part of our strategy, the strategy behind our success. Gordon and I and Dave look forward to talking to you on our next call. Thanks very much.

Thank you. This concludes today's conference call. You may now disconnect.