Cognizant Technology Solutions Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013, compared with the three months ended March 31, 2012, unless otherwise noted. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Business context
Cognizant provides IT consulting, application development and maintenance, infrastructure services, and business process outsourcing. Its reportable segments are Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. The company reported approximately 1,000 active clients and 162,700 employees at quarter-end.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $2,020.7 million | $1,711.3 million; up 18.1% |
| Income from operations | $365.9 million; 18.1% margin | $317.9 million; 18.6% margin |
| Non-GAAP operating margin | 19.9% | 20.8% |
| Net income | $284.2 million; 14.1% of revenue | $243.7 million; up 16.6% |
| Diluted EPS | $0.93 GAAP; $1.02 non-GAAP | $0.79 GAAP; $0.88 non-GAAP |
| Operating cash flow | $73.5 million | $101.8 million |
| Cash, cash equivalents and short-term investments | $2,744.4 million | At March 31, 2013 |
| Working capital | $3,610.8 million | At March 31, 2013 |
| Third-party debt | None | At March 31, 2013 |
Net cash used in investing activities was $185.9 million, including $139.3 million for business combinations and $72.2 million for property and equipment purchases. Net cash from financing activities was $16.9 million. Cash and cash equivalents fell by $95.2 million during the quarter to $1,474.9 million. Operating cash flow was pressured by working-capital needs, including higher receivables and liability payments; days sales outstanding, including unbilled receivables, rose to 76 days from 72 at December 31, 2012.
Changes versus the prior comparable period
- Revenue growth was broad-based: Financial Services rose 23.1%, Manufacturing/Retail/Logistics 27.2%, Healthcare 9.1%, and Other 7.0%.
- North American revenue grew 16.3%, European revenue 22.7%, and Rest of World revenue 35.4%.
- Cost of revenues grew 21.9%, faster than revenue, and operating margin declined 0.5 percentage points. Management attributed margin pressure chiefly to investment in growth and delivery capabilities; currency effects and scale economies partly offset it.
- Healthcare segment operating profit declined 2.9% despite revenue growth; total segment operating profit increased 5.1%.
- Operating cash flow declined by $28.3 million year over year, mainly reflecting working capital required to support growth.
- Q1 included the acquisition of six C1 Group companies for approximately $136.8 million net of cash acquired. The acquisition expanded German and Swiss presence and enterprise application and testing capabilities; the company said it was not material to its operations, financial position, or cash flow.
Outlook, management commentary and risks
- No specific full-year revenue or earnings guidance is stated in the supplied filing text. Management continued to target a 19%–20% non-GAAP operating margin and said it expects to reinvest amounts above that range in the business. The non-GAAP measure excludes stock-based compensation and acquisition-related charges.
- Management expected approximately $400 million of global capital expenditures in 2013, including India development-center expansion. The company had $131.2 million of fixed capital commitments for that program at March 31; its longer-term India plan called for more than $700 million of spending during 2011–2015.
- Management said operating cash flow and cash resources should meet operating requirements for the next 12 months, with no anticipated near-term liquidity issues. It noted that $1,561.5 million of cash, cash equivalents and short-term investments was held by foreign subsidiaries and that most foreign funds were intended to remain overseas.
- Currency exposure is significant: Indian-rupee costs represented about 28.1% of global operating costs. Rupee cash-flow hedges had $3.038 billion notional value; settlements reduced Q1 operating margin by about 1.06 percentage points. Management reported a $21.3 million loss on settled cash-flow hedges.
- Key risks include economic weakness in the U.S. or Europe, customer spending and concentration, wage and talent pressures in India, foreign-exchange volatility, changes to Indian tax holidays or other tax rules, immigration restrictions, competition and pricing, fixed-price project execution, receivable collection, cybersecurity and confidentiality claims, and acquisition integration. The top five customers represented 14.1% of quarterly revenue; no single customer exceeded 10%.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. Client indemnities and claims involving service failures, confidential information, or sensitive data could nevertheless create significant exposure; maximum indemnification amounts were not quantifiable.
- In May 2013, after quarter-end, the board expanded the stock repurchase authorization from $1.0 billion to $1.5 billion and extended the program through December 31, 2014. Q1 repurchases totaled $16.4 million.
Most important facts for investors to verify
- Whether subsequent quarters sustain 18.1% revenue growth while stabilizing GAAP and non-GAAP operating margins.
- Whether receivables, unbilled balances, DSO, and operating cash conversion improve as revenue expands.
- How rupee movements and hedge settlements affect costs and margins, including the substantial notional hedge exposure.
- Whether the C1 Group acquisition delivers the expected capability and geographic benefits, and how acquisition-related costs develop.
- Whether planned capital spending, repurchases, and overseas cash positioning remain consistent with liquidity and growth priorities.
- Whether Indian tax incentives, talent costs, immigration rules, customer demand, and contractual or data-security exposures change materially.