Cognizant Technology Solutions Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited U.S. GAAP results. Cognizant provides IT, consulting and business-process services. Comparisons are with Q1 2014 unless otherwise noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $2,911.4 million | $2,422.3 million | +20.2% |
| Operating income / margin | $500.3 million / 17.2% | $460.0 million / 19.0% | Income +8.8%; margin down 1.8 percentage points |
| Net income / net margin | $382.9 million / 13.2% | $348.9 million / 14.4% | Income +9.7%; margin down 1.2 points |
| Diluted EPS | $0.62 | $0.57 | +8.8% (rounded) |
| Operating cash flow | $189.3 million | $157.3 million | +$32.0 million |
| Cash, cash equivalents and short-term investments | $3,349.8 million | — | At March 31, 2015 |
Non-GAAP operating margin was 19.8% versus 20.8%; non-GAAP diluted EPS was $0.71 versus $0.62. These company-defined measures exclude specified stock-based compensation, acquisition-related charges and, for EPS, net non-operating foreign-exchange gains or losses; they are not GAAP measures.
- Segments: Financial Services revenue rose 13.4% to $1,161.1 million; Healthcare rose 42.7% to $879.1 million; Manufacturing/Retail/Logistics rose 7.2% to $548.9 million; Other rose 19.0% to $322.3 million.
- Cash and liquidity: Working capital was $4,522.4 million. Cash and cash equivalents were $1,271.4 million, down from $2,010.1 million at year-end; short-term investments were $2,078.4 million. Investing activities used $364.0 million and financing activities used $557.3 million.
- Debt: Total debt was approximately $1,075.0 million: $150.0 million current and $925.0 million long-term. The company repaid $550.0 million of revolving-credit borrowings during the quarter; $100.0 million remained drawn, with $650.0 million of the facility available. It reported compliance with debt covenants.
- Other metrics: Effective tax rate fell to 25.0% from 26.3%, principally due to discrete tax benefits. Comprehensive income was $386.7 million, compared with $457.9 million, reflecting the sharply lower contribution from other comprehensive income.
Material changes and drivers
- Revenue increased $489.1 million. The November 2014 TriZetto acquisition contributed approximately $169.0 million, primarily to Healthcare; new customers, including TriZetto customers, contributed $178.6 million of growth.
- North America revenue grew 24.8%; Europe grew 1.2% despite a reported 10.7% negative currency impact; Rest of World grew 23.7% with a 5.8% negative currency impact. A stronger U.S. dollar reduced revenue by $61.9 million year over year.
- Operating margin declined as compensation and benefits, subcontracting, growth investments, and acquisition-related depreciation and amortization increased. Headcount reached approximately 217,700, up about 39,100 year over year. Lower realized losses on cash-flow hedges partly offset these pressures.
- Receivables increased: trade receivables were $2,059.9 million and unbilled receivables were $388.2 million. Under the company’s revised DSO calculation, days sales outstanding were 73 days, versus 70 at year-end and 70 a year earlier.
Outlook, risks and contingencies
- The filing gives no specific numerical revenue, earnings or margin guidance. Management said it expects operating cash flow, cash and investments, and revolving-credit availability to cover operating requirements for the next 12 months. It expects to continue investing beyond its targeted 19%–20% non-GAAP operating margin.
- Management cited continued customer focus on cost containment and innovation, demand for digital services and complex projects, foreign-exchange volatility, economic uncertainty, and the addition and integration of TriZetto. Plans include investment in talent and digital offerings, international expansion, client growth, cost discipline and selective acquisitions.
- Key risks include wage and talent-cost inflation, margin pressure, currency movements (including Indian-rupee exposure), customer concentration, execution and integration of acquisitions, cybersecurity and data-protection failures, project delivery and fixed-price contract risk, and changes to Indian tax benefits. The company uses currency hedges; outstanding designated contracts had $2.91 billion notional value and a $54.2 million net unrealized loss at March 31.
- Ordinary-course legal claims and proceedings were not expected by management to have a material adverse effect. Client indemnities and potential claims relating to service failures, confidential data or contractual obligations could nevertheless be significant; maximum indemnification exposure was not determinable.
- The company repurchased $25.0 million of shares under its authorization and $13.4 million through employee tax-withholding share tenders. It reported no material change in risk factors, no material change in internal control over financial reporting, and no other off-balance-sheet arrangements beyond foreign-exchange contracts.
Important facts for investors to verify
- How much of continued growth is organic, versus TriZetto and new-customer contributions, and whether Healthcare growth and acquisition integration are sustainable.
- Whether revenue growth can outpace employee, subcontractor and investment costs enough to stabilize operating margins.
- Receivables collection and DSO trends, given the quarter’s higher receivables and DSO under the revised calculation.
- Currency, hedge-settlement and tax effects, including the sensitivity of margins to the Indian rupee and the future tax treatment of foreign earnings.
- Debt repayment, liquidity allocation, share repurchases and the use of cash held outside the United States.