Cognizant Technology Solutions Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results; amounts in U.S. dollars unless noted.
Business context
Cognizant provides consulting, technology, digital, application, infrastructure and business-process services. Its four reportable segments are Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology (CMT). Management highlighted demand for cloud, automation, AI, e-commerce and other digital services. Acquisitions contributed to growth, while legacy-service work remained subject to pricing pressure.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4.744B | $4.243B | $13.730B | $12.468B |
| Revenue growth | 11.8% (11.0% constant currency) | — | 10.1% (8.4% constant currency) | — |
| Operating income / margin | $729M / 15.4% | $603M / 14.2% | $2.094B / 15.3% | $1.649B / 13.2% |
| Adjusted operating margin | 15.8% | 15.9% | 15.4% | 15.1% |
| Net income / net margin | $544M / 11.5% | $348M / 8.2% | $1.561B / 11.4% | $1.076B / 8.6% |
| Diluted EPS | $1.03 | $0.64 | $2.96 | $1.98 |
| Adjusted diluted EPS | $1.06 | $0.97 | $3.02 | $2.75 |
| Operating cash flow | Not separately reported | Not separately reported | $1.670B | $2.401B |
Q3 revenue growth included approximately 300 basis points from recent acquisitions. Segment revenue growth was 5.1% in Financial Services, 10.0% in Healthcare, 19.4% in Products and Resources, and 20.0% in CMT. For the nine-month period, growth was 4.4%, 10.7%, 15.0%, and 15.2%, respectively. Constant-currency figures are non-GAAP measures.
Cash, debt and liquidity: At September 30, cash and cash equivalents were $1.664B and short-term investments were $749M, totaling $2.413B. Total debt was approximately $674M, including $38M current and $636M long-term. The $1.75B revolving credit facility had no outstanding balance; approximately $1.925B of credit-facility capacity was available. Current assets were $6.995B and current liabilities $3.319B. The company reported compliance with debt covenants.
For the first nine months, investing activities used $1.666B and financing activities used $1.007B; cash and cash equivalents decreased by $1.016B. The company returned $1.071B to stockholders, including share repurchases and dividends. DSO was 72 days, unchanged from the year-earlier period.
Changes versus comparable periods
- Q3 revenue rose 11.8%; operating income increased 20.9% and net income increased 56.3%. The net-income comparison benefited substantially from a $140M tax charge recorded in Q3 2020 related to accumulated Indian earnings and from the absence of 2020 restructuring charges.
- Q3 GAAP operating margin improved 1.2 percentage points, while adjusted operating margin edged down 0.1 point. The 2021 quarter included a $20M securities class-action settlement loss; Q3 2020 included $51M of restructuring charges and $21M of COVID-related charges.
- Nine-month revenue increased 10.1%, operating income 27.0%, and net income 45.1%. Operating cash flow, however, fell $731M year over year, partly reflecting tax payments deferred in 2020 and remitted in 2021 and higher incentive-compensation payouts.
- Interest income declined, partly because cash held in India was lower following repatriation in late 2020. The effective tax rate was 25.6% for Q3 and 25.4% year to date, versus 44.2% and 33.9% in the comparable 2020 periods.
Outlook, commentary and risks
The filing does not provide specific quantified revenue, earnings or margin guidance. Management described continued client digital transformation and demand for digital operations, while warning of pricing pressure in non-digital services. Its stated priorities include accelerating digital growth, strengthening its brand, expanding globally and increasing client relevance; it expects to continue considering acquisitions, investments and alliances.
- Annualized employee attrition was 37.0% in Q3, with voluntary attrition significantly elevated. Management said talent shortages and related recruitment and compensation costs could constrain service delivery, revenue potential and margins.
- COVID-19 effects remained uncertain; a severe resurgence, particularly in India where much of the workforce and operations are located, could disrupt delivery.
- Negotiations continued with a third customer concerning an exit from a large Financial Services engagement in Continental Europe. The final terms could differ materially from current accounting assumptions and affect results, financial condition or cash flows.
- The Indian tax department disputes prior share-repurchase transactions and asserted an additional 33 billion rupees (about $445M) for the 2016 transaction. Cognizant recorded no reserve, stating it believes taxes owed were paid. Restricted deposits and amounts held under lien totaled approximately $466M at September 30.
- A proposed $95M securities class-action settlement received preliminary court approval; final approval remained outstanding. Cognizant recorded a $20M loss after available insurance. Other litigation includes shareholder derivative actions and an India employee-benefit obligation with uncertain ultimate exposure.
- Cognizant reported an $855M jury award in its favor in the Syntel matter, later reduced by the court to $570M; the judgment was stayed pending appeal. The company said it would not recognize a gain until realizable.
Management stated that cash, investments, operating cash flow and available credit were expected to cover operating needs and debt service for the next 12 months. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether high attrition and competition for skilled employees affect delivery capacity, costs and the ability to convert digital demand into growth.
- Final approval and completion of the securities class-action settlement, and potential further legal costs given exhausted insurance availability for certain related obligations.
- Developments in the Indian tax dispute, including the status of restricted deposits and the adequacy of the company’s no-reserve position.
- Cash-flow conversion, working-capital trends and acquisition spending relative to earnings, buybacks and dividends.
- How much reported growth is organic and constant-currency, and whether margin performance holds as acquisition costs, wage pressures and investment spending evolve.
- Potential financial effects of the unresolved customer engagement and the Syntel appeal.
Adjusted results and constant-currency growth are non-GAAP measures and should be considered alongside reported GAAP results.