Ladies and gentlemen, welcome to the Cognizant Technology Solutions third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks will be a question and answer session. If you'd like to ask a question at that time, please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. I'd now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.
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, where appropriate to the corresponding GAAP measures, can be found in the company's earnings release and other filings with the SEC. With that, I'd like to now turn the call over to Brian Humphries. Please go ahead, Brian.
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 an uncertain macroeconomic backdrop impacted bookings and revenue, the primary driver of the revenue shortfall relates to a reduction in U.S. onshore billable resources in recent quarters following a period of elevated attrition, a 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 dollar per head population.
To reverse this trend, we have already initiated a series of actions that are intended to increase U.S. 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 clearer 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 two points sequentially to 29% on an annualized basis and fell three points sequentially on a trailing twelve-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. To maintain positive momentum on resignations, 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. Spend 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 digital projects. Industry-wise, we've seen weakness in banking, especially in the mortgage segment, health sciences and retail. In our international business, the U.K. remains solid, but deal cycles are slowing, while continental Europe is showing signs of weakness. From a commercial point of view, despite a strategy to sell solutions 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-period book-to-bill ratio of 1.0x and a book-to-bill ratio of 1.2 x on a trailing twelve-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 include large-scale data and application core modernization in cloud migrations.
We're also helping them develop and scale advanced capabilities in data and analytics to drive significant operational efficiencies in their closed book portfolio. We were selected by AXA UK & Ireland as a technology partner to help consolidate, modernize, and manage part of 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, a 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 our digital services among logistics, automotive, consumer goods, and travel and hospitality clients. During the quarter, we extended our long-standing relationship with Centrica, the U.K.'s largest supplier of energy and energy services, deliver business-critical services encompassing application testing, cloud infrastructure support, 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 latecomer to outsourcing 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. He will join us in mid-January from Infosys, where he served as president for the past six years. Ravi brings client centricity and a growth mindset that we believe will help improve our U.S. 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 our resources globally and getting the right mix on and off shore 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're in an 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'll 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.
Thank you, Brian, and good afternoon, everyone. Q3 revenue was below our guidance range, driven primarily by lower billable headcounts 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. 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% at 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 a 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 1x.
This resulted in a trailing twelve months bookings of $23.1 billion and a 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 Sciences, 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 and constant currency from a geographic perspective in Q3, North America revenue grew 4%. Growth was led by CMT and Health Sciences.
Our global growth markets, or 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 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 $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, or net cash of $2.1 billion. Free cash flow in Q3 was $953 million, representing approximately 150% of net income, in line with our expectations.
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 increased by 2 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 dividend. This brings total capital return to shareholders through share repurchases and dividends to approximately $1.5 billion through the first 9 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-$4.77 billion, representing year-over-year decline of 0.2%-1.2% or growth of 2%-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 contribute 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-$19.9 billion, which represented growth of 6.3%-7.3% or 8.5%-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 shares unchanged. Our tax guidance of 24%-25% is unchanged. Finally, our revised full year adjusted EPS guidance of $4.43-$4.46 represents growth of approximately 7%-8%. This compares to prior guidance of $4.51-$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 assumption 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, 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.
Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad and the confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask you please limit yourself to one question and one follow-up. One moment please while we poll for questions. Thank you. The first question comes from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.
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 at 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 this recent. You know, have you pinpointed, like, specifically what's causing the elevated attrition? Maybe elaborate a bit on you know, the timeframe and the steps you're taking to address it. Thank you.
Hey, Lisa, it's Brian. 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 had the biggest impact on our attrition historically, so we put inordinate efforts and war rooms in place over there. You know, frankly, in India as well as in North America and our international business in Europe and Asia, we have seen resignations come down pretty much for four to five months in a row now. 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. On top of comp, there's perks, there is career path progression, promotion process overall, learning and development initiatives, et cetera.
The North America efforts are somewhat similar to what we're doing globally. I think in North America, you know, we've gone through a pretty material visa.
I would say, a process in the last three years as we reduce our visa dependency. Obviously in a tough market environment where digital skills are 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. Those factors coupled with what's effectively happened across the industry and ours was no different, 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 dollar per head in North America versus in India. 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.
Mm-hmm. Mm-hmm.
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.
Got it. Okay. 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, you know, issues or kind of, you know, that linkage. I think you were having challenges that some of your salespeople perhaps were concerned they wouldn't be able to staff a project or something.
Yeah.
Right. I guess it persisted into this quarter, so can you just also-
Yeah.
Mm-hmm.
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 the second half of last year, with 20% + bookings growth. That leads to even an in-quarter bookings book-to-bill of 1.0 and on a trailing twelve-month basis, still a 1.2. 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 environment. We've seen lengthening purchase cycles and clients being a little bit more judicious in their approval of expenses.
You know, Lisa, specific then to the impact of attrition, by definition as people were dialoguing with clients around price increases, which has been one of our success stories, helping margin, as well as addressing fulfillment challenges, it's made, you know, the commercial team somewhat hesitant, I think, to go the full mile 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.
I think we're starting now to get confidence in the commercial team that the effort we put in place around attrition and resignations 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. That's probably been a bigger impact on bookings this quarter than previously. The whole concern amongst the C-suites as they're 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 certainly anticipate furloughs at the end of this year relative to last year. It remains to be seen, and we factor that into our guidance.
Mm-hmm. Mm-hmm. Okay. Thank you. Thanks a lot.
Our next question is from the line of Rod Bourgeois with DeepDive Equity . Please just give your question.
Yes, guys. Hey, you have 4% constant currency growth in North America and essentially 10% outside of North America. 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 your talent challenges are more pronounced in North America. Some color on that would be really helpful.
No, I'll start with the international business, which we expect, you know, very good things in the coming years there. We've refreshed some leaderships over there. We've added with the seniority of the people we've recruited. We've added M&A to complement their capabilities. Examples of that include the UK, Germany and Australia. I've spent a large part of the, you know, the last year going around the world, and I'm pretty optimistic around our potential internationally. Rod, you know, optimistic, but I don't think it's really taken away from the North America focus. You know, in North America, Canada leader has been a shift more to offshore than nearshore. We're building out capabilities in Canada, but candidly a shift towards India has happened.
Our net headcount has materially increased in India on a year-over-year basis, and we get the balance right. Now three years ago, we were overly 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've gone a little bit too far on that. 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.
Now that we're turning that tap on a little bit to rebalance subject to the capacity of consulates, that will not only help onshore headcount, but actually help morale and I believe attrition in India as well. I think the U.S. onshore situation is independent of the international positivity that I have, and, you know, I'm very optimistic around our potential there in years to come.
Great. Hey, 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'd be great to hear some thoughts on the cloud market.
Well, 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, you know, spent a great deal of time talking about where that market is going. Ironically, in a client advisory board last week, it was a great topic of discussion among us and 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. Yesterday's announcements of OneSource Virtual will continue to strengthen our Workday practice. Vis-à-vis the hyperscalers, you know, it's kind of interesting. I'm seeing clients clearly accelerate their path to the cloud.
In the same vein, Rod, I see a growing dialogue among clients around how to optimize your position in the cloud, as in lifting and shifting your current suite of applications without refactoring in or another way, transforming ahead of the transition. It doesn't necessarily always give them the efficiencies that they would have anticipated. There's more dialogue around how to optimize your cloud journey. 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, you know, cloud modernization journeys or tech mod more generally. You'll see us add more advisory capabilities there as well.
Excellent. Thank you.
Our next question is in the line of Ashwin Shirvaikar with Citi. Please proceed with your question.
Thank you. Could you talk about what you're seeing in digital, especially since you mentioned slowing discretionary spend? Is that more of a company-specific positional thing? Because other companies we've spoken to have not yet mentioned anything specific with regards to digital specifically slowing down.
Hey, Ashwin. Look, the first thing on a broader macroeconomic environment, I'd say it's difficult to be conclusive or dogmatic at this moment in time. It's certainly what we would term an 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. You know, we are seeing spend being reduced on 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. I still have a lot of confidence in our digital capabilities. Our portfolio is now 51% digital, up 2 points year-over-year. Some of the challenges we talked about, you know, the macro demand picture as well as the U.S. onshore situation are equally applicable to this.
As you know, yesterday's announcement of an acquisition is the first acquisition we've done this year, so we haven't had the tailwind in 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. I'd expect that ultimately over time to get back on a more normal course for us. You know, I don't believe that all digital projects will be immune from the current economic climate.
Maybe in addition, Ashwin, to give you a little bit more of the 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. If you multiply that times the share of digital revenues, you'll see there is an impact on just mathematically on the lack of M&A, fueling digital growth. Then, aside from the market demand that Brian mentioned, obviously in North America, we are also affected by our fulfillment challenges that we experienced in the quarter, which proportionally affected our non-digital business as well as our digital business. It's a combination of all these factors together.
Got it. What does this lower exit growth rate for the year mean in terms of achieving sort of your medium-term targets? You know, I completely appreciate the high level of macro uncertainty that we have, but any granular parts of how you're planning for next year would be greatly helpful.
Yeah. That, somehow I thought this question would come up. 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 framework sees our revenue growth, which you're referring to really in light of a CAGR over the three-year time horizon. It's compounding growth, and obviously we didn't quite anticipate at that point the economic uncertainty that we're facing today. We think the framework from our perspective is intact. Then we will give guidance obviously for next year in our fourth quarter earnings call in January.
Thank you.
Our next question's from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
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's caused you to miss the guidance, that and maybe the economy a little bit. Just trying to figure out, you know, is the fourth quarter, how comfortable are you with those numbers? Or could we still have some of these fulfillment issues lingering that could push us into lowering expectations again?
Yeah. Maybe I'll start with it and then I'll let Brian jump on top of it. If we think about the miss, as Brian mentioned and as we talked in our call, it had a number of factors in it, and fulfillment is fairly logical, so we misjudged or we had a little bit faster improvement in the third quarter than we anticipated. About that miss on attrition improvement made about a third of our miss relative to our expectations. Then we have a number of initiatives in place to accelerate the hiring and inflow in particular in North America, and that represents approximately also a third of our miss to revenue guidance.
Here, we obviously saw the North American challenge to grow our headcount and there are initiatives in place from funding our and ensuring we have full capacity of hiring in place, to focusing on the full breadth of resources available to us, including the utilization of subcontractors, and accelerating visa travel and increasing employee referral programs. We have a set of initiatives in place. These initiatives have shown initial momentum, but they were scaling slower than we anticipated. We have now a trajectory, and we think we have appropriately risk-adjusted our new revenue guidance. We're keenly interested to meet our own expectations in it.
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.
Yeah, just to build on that, you know, the resignations visibility we have, of course, differs in India versus North America because the notification period in India is slightly different. I mentioned on last quarter's earnings call how July resignations have come down, and through August and September was a different plateau for those three months vis-a-vis the prior six months, certainly if you look at India and indeed in North America and Europe. In the first month of this quarter, it's continued to be low, in fact, lower than the prior three months. We feel, Brian, at this stage, very, very confident about that. As Jan rightly pointed out, we wanted to give guidance that we wanna make sure we can hit. You know, we're in the right zone.
Got it. Do 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?
We're aiming, as I 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, I'm gonna clearly give you an update on that in next quarter's earnings call. We hope to walk into Q1 with clearer progress by the time we get through Q1.
Okay. All right. Thanks so much.
The next question is from the line of Brian Bergen with Cowen. Please proceed with your question.
Hi, thanks. This is Zack Ajzenman on for Brian. 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? 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 a digital transformation partner of choice?
We actually see different stories, to be honest, Brian, 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. More fundamentally, you know, 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 then with a client-facing team that is more consultative in nature. As anybody who's overseen a sales force knows, that is a multi-year journey. We're on route, but it takes time to get there. To complement then that more consultative sales force with a more industry-aligned consulting business.
That's the space you should continue to watch in Cognizant because we will, you know, invest behind that, and we've got strong leaders in that capacity these days. Just to make sure that there's increasing brand awareness around the capabilities we have and references and case studies that we can showcase. Last week in the client advisory board was a very good example of certain clients not really being truly aware of the extent of our portfolio. We have to do a better job marketing that ourselves. I would say brand awareness of the company is up. Digital awareness is increasing, but it's a multi-year journey and we're in the middle of all of that. It starts with, you know, our client-facing teams and our delivery capabilities and our partnerships.
I certainly see, you know, in dialogue with some of our key packaged application partners, like Salesforce and SAP, growing recognition that we are getting stronger. As ever, you know, 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 we're pleased to cross, but there's more work to do.
Got it. That's helpful. Just to follow up, the forward-looking attrition commentary is encouraging. You've been vocal about the 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.
I think it's very hard to really be precise on that, Brian. 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, on key digital skills. We're going through a hybrid work environment as a society where arguably people are less entrenched or engaged with companies as they work remotely. Now we've gone through a very different scenario that the economy is uncertain, slowing, and recruiters are being laid off across the globe. We're seeing in certain companies, people are being laid off. The market is suddenly perhaps less hot than it was previously. That can also have an immediate impact on attrition trends and voluntary resignations in particular.
You know, we will see where water finds its own level over time. I'm encouraged by our specific actions that we've taken. Jan and I have also built that into our financial plan. We have, notwithstanding a slowing, I would say, labor market, we know that we want to invest on a sustainable basis in our employees in the years to come, and we factor that into our multi-year financial framework, and that will help increase our relative compensation vis-à-vis peers. Simultaneously, we're doing everything we can around training and development and career path, and employee value proposition. You know, I'm not sure when it normalizes to a new norm. I still believe there will be a new norm, and we won't go back to historical levels.
I think as a society at large, we'll probably see attrition slow across the industry in Q4 and beyond, but you know, time will tell.
Helpful. Thanks.
Our next question is on the line of James Faucette with Morgan Stanley. Please proceed with your question.
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 that relates to fulfillment, where are you seeing the most challenges in terms of finding the appropriate people and getting them into your fulfillment capabilities right now? How are you thinking about the pyramid itself as it relates to solving for that? I'm just wondering, you know, how that then impacts the way that you think about financial guidance. Kind of a complicated question, but hopefully that's clear.
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. By definition, then you have different bill rates. Within India, the lower levels of our pyramid are actually fatter, for want of a better word, than they were in the last few years. That's because, you know, if you go back this year, we're bringing in about 40,000 graduates, 45. Last year, 33. The year before, about 17. The year before, less than 10. We had been too narrow as a pyramid 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. James, the fundamental element in terms of the demand-supply economic imbalance and key digital skills was heavily related to skills related to, you know, all the hyperscalers, things like Salesforce, Angular, full stack engineers. I mean, they've been probably the hottest parts of the market, and there's been 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 hottest challenges.
In terms of the absolute attrition, it's predominantly been in India, and at the lower levels of the pyramid.
Got it. 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? Are they gonna be permanent? I guess, should we expect two cycles a year? Just trying to make sure that we're contemplating that, how that flows through the actual P&L appropriately.
Yeah, that's maybe for me to answer. 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 a main reason for it is to better align our HR processes, the evaluation processes and reward processes together. It is a benefit from a talent management perspective to have our merit increase in the second quarter. That's really a very important driver of it. A second important driver is obviously because we're accelerating this merit cycle by two quarters, we will incur a one-time shift of compensation by two merit increase by two quarters forward. That's gonna be a one-time effect only because we're staying with an annual merit increase process.
In 2024, the normal cycle will be four quarters later, again in the second quarter of the year. We are capturing basically, I think, here an opportunity to improve our talent management processes.
Which also allows us to drive a faster compensation increase to our associates, which we think is timely because we really do wanna be focused on attrition and we anticipate 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.
Thank you.
You're welcome.
The next question is from the line of Tien-Tsin Huang with JP Morgan. Please proceed with your questions.
Thanks so much, as always. Just thinking about the knock-on effects of the fatter pyramid plus the attrition, is there an impact there in 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.
Maybe I'll talk a little bit about our overall, maybe gross margin development.
Yeah.
Kind of what you're focusing on, Tien-Tsin, here is, we did see obviously a decline, but I think the relative performance overall compared to the industry has been relatively good. 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 at it for a little while, 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. 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. That has been getting better and has helped us on the relative gross margin performance.
Also, the shift in the 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 pyramid, as Martin mentioned. That paired with these 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. We're feeling, I think, good. Well, we're feeling good about the improvements we're making of how we manage the business opportunities. It's a thoughtful process. It allows us actually also to make our strategic bets going forward.
I think our margin profile is in good shape and that should offer us opportunities to make our strategic bets where we wanna go and grow faster revenues on a much more solid base than we are today.
Yeah. The only thing I would add there, Tien-Tsin, is, you know, I don't think we were doing anything except correcting what was an overly narrow pyramid back in the day. On the contrary, I think, you know, because we had somewhat canceled the college intake in prior years, it led us having folks further up the pyramid doing work at lower billable rates than were optimal. I think what we've done in India is appropriate, and it's more in line with industry rates based on dialogue I have with those from other companies. Where we have to do a better job on campus and college graduates, I think, is 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, so we have to look at vocational colleges and not just the classic places as well, and that's an area of focus we'll have. Fortunately, with Ravi coming on board in North America, he has run a play there previously, which we will obviously aim to replicate over here, and that can help our pyramid. You know, 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 skill set in our pyramid. We've got very talented employees, and I feel good about that.
Great. No, 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 a capital allocation question. Just with the buyback of the authorization here, just the appetite to buy back stock. I know you talked about the acquisition you just announced, but just thinking about buyback here at this point in the cycle. Thanks.
Yeah. For this fiscal year, we gave you basically our anticipated number for $1.2 billion. You see over the last few quarters, as we have been lacking M&A activities, that we basically redirected excess cash to return to our shareholders. That's the general philosophy that we've been following. There's no intent to build up cash on our balance sheet. That flexibility is in the model. We are seeing a good pipeline though of our M&A activity. This, we announced the deal. Compared to last quarter, we really have moved the needle forward on our business development activity with a very talented team. We see also, I think, a little bit more realistic behavior in the market relative to acquisition opportunities.
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's gonna be the mindset for us going forward.
Thank you.
Thank you. Next question's from the line of Darrin Peller with Wolfe Research. Please proceed with your questions.
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, you know, 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 and bookings. Number two, you know, 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.
Yeah, and 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 about 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 of growth. 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, you know, let's say, tightening their belts as they go into the fourth quarter and beyond.
I think that will be a tougher sector for others as well. 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 the clients think of us. We very often train them to think of us as a provider of resources. I'm pleased to say that our digital mix in financial services is improving and 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. That's obviously in banking area we've 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, 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 in the TriZetto business in the last few years, so I feel pretty good about our relative position there. If I talk about the other two portions of the business, you know, where we have 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 sciences. You can think of that or indeed the payer business where we are heavily penetrated into the major players. So that's kind of how I think about the framework. The factors we touched upon today, elevated attrition across the industry and Cognizant within that permeated across all industry segments. And indeed, the U.S. onshore situation permeated across all as well. Nothing specific to either of those.
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. Just thinking about that in terms of, you know, going forward a little more than just fourth quarter, it would seem that if wage inflation calmed down a bit, you should be able to maintain that level. Is that a fair assumption?
Well, I have to say the standard answer in the third quarter, we give guidance in the fourth quarter, but I did mention that we feel our overall framework, our multi-year framework is intact. That didn't refer only to the revenue, but it refers also to our margin expectations.
Right.
That's kind of as far as I wanna 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. 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. 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.
You heard me in the second quarter, and now it continues in the third quarter. We have a good process in place to balance that business out, you know. Our focus is to maintain that discipline, obviously, and then really accelerate the revenue growth. That is the main focus that we're driving on because that's our biggest opportunity and use this, the margin profile as a great foundation for that.
Okay. That's helpful. Thanks, Brian. Thanks, Jan.
Thank you. This will conclude today's Q&A portion of the call.
Great. Thank you all for joining. I look forward to catching up next quarter.
This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.