Cognizant Technology Solutions Corporation — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. Cognizant provides IT, consulting, and business process services. The November 2014 TriZetto acquisition contributed materially to Healthcare growth.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,085.1 | $2,517.1 | $5,996.5 | $4,939.4 |
| Revenue growth | 22.6% | — | 21.4% | — |
| Operating income | $545.5 | $488.0 | $1,045.8 | $948.0 |
| Operating margin | 17.7% | 19.4% | 17.4% | 19.2% |
| Net income | $420.1 | $371.9 | $803.0 | $720.8 |
| Diluted EPS | $0.68 | $0.61 | $1.31 | $1.18 |
- Q2 non-GAAP operating margin was 20.2% versus 21.0%; non-GAAP diluted EPS was $0.79 versus $0.66. For the six-month periods, those measures were 20.0% versus 20.9% and $1.50 versus $1.28. The company’s non-GAAP measures exclude stock-based compensation and acquisition-related charges; non-GAAP EPS also excludes net non-operating foreign-exchange gains or losses.
- Six-month operating cash flow was $645.4, compared with $565.6. Investing activities used $853.5 and financing activities used $706.4. Cash and cash equivalents ended the period at $1,089.3.
- At June 30, cash, cash equivalents, and short-term investments totaled $3,566.5; working capital was $4,814.9. Total debt was $1,062.5, comprising $150.0 short-term debt and $912.5 long-term debt. The $750.0 revolving facility had $100.0 drawn, leaving $650.0 available. The company reported compliance with its debt covenants.
- Current assets were $6,771.4 and current liabilities $1,956.5. Trade receivables were $2,162.2 and unbilled receivables $386.5; management attributed their increase partly to higher revenue and higher days sales outstanding.
Material changes and drivers
- TriZetto contributed approximately $171.1 of Q2 revenue and $340.1 for the first half. Healthcare revenue grew 39.0% in Q2 and 40.8% in the first half, including TriZetto.
- Q2 revenue grew across all segments: Financial Services 18.1%, Healthcare 39.0%, Manufacturing/Retail/Logistics 12.4%, and Other 20.3%. North America grew 25.7%; Europe grew 7.7% and Rest of World 30.0%, both including adverse currency impacts.
- Revenue growth was led by consulting and technology services, up approximately 34.8% in Q2; outsourcing revenue increased approximately 9.2%.
- Margins declined as employee and benefit costs, headcount growth, subcontractor expense, business investment, and acquisition-related depreciation and amortization increased. Lower realized cash-flow-hedge losses partly offset these pressures. Q2 GAAP net margin fell to 13.6% from 14.8%.
- Six-month net income benefited from a lower effective tax rate of 24.2% versus 26.1%, including discrete tax benefits related in part to settlement of an uncertain tax position.
Outlook, commentary, and risks
- No specific full-year revenue or EPS guidance is provided in the supplied filing text. Management said it expected operating cash flow, cash and investment balances, and available revolver capacity to meet operating requirements for the next 12 months.
- Management expected continued demand for cost-containment and transformation projects, digital services, and larger complex engagements, while identifying currency volatility, economic uncertainty, and the TriZetto business as factors affecting the remainder of 2015. It planned continued investment in talent, digital capabilities, service offerings, and international growth, with ongoing cost discipline.
- Management targets a 19%–20% non-GAAP operating margin and said it generally reinvests profits above that range. It raised 2015 incentive-compensation accrual rates in Q2 following better-than-expected results.
- Foreign exchange is a significant exposure: the strong U.S. dollar reduced Q2 revenue by $75.1 and first-half revenue by $139.1. The company reported $12.6 of net foreign-exchange losses for the first half and had $2,730.0 notional value of Indian-rupee cash-flow hedges outstanding.
- Key risks include wage and skilled-labor cost pressures, margin execution, currency movements, customer concentration and retention, cybersecurity or service failures, fixed-price project execution, healthcare regulation, and acquisition integration. Management said existing legal proceedings were not expected to have a material adverse effect, but large uninsured or uncovered client claims could be material.
- The company repurchased $177.9 of shares under its authorization during the first half; $636.0 remained available at June 30. It also repurchased shares to cover employee tax withholding obligations.
Important facts for investors to verify
- How much reported growth and Healthcare performance depend on TriZetto versus organic growth.
- Whether operating margins recover as hiring, compensation, subcontractor, and acquisition-related costs evolve.
- Receivables, unbilled balances, and days sales outstanding; the filing reports 72 days under the revised calculation at June 30, 2015.
- Exposure to currency changes, hedge settlements, and the sensitivity of earnings and margins to the Indian rupee and other currencies.
- Debt repayment, liquidity access, share repurchases, and the tax implications of any future repatriation of foreign earnings.