Cognizant Technology Solutions Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Cognizant provides technology and professional services, including consulting, digital services, application development and outsourcing.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $4.812 billion | $4.826 billion; down 0.3% reported, up 1.5% in constant currency |
| Operating income and margin | $702 million; 14.6% | $724 million; 15.0% |
| Net income | $580 million | $563 million |
| Diluted EPS | $1.14 | $1.07; adjusted diluted EPS was $1.11 versus $1.08 |
| Operating cash flow | $729 million | $306 million |
| Investing and financing cash flow | $(215) million; $(350) million | $(915) million and $250 million year-over-year change, respectively |
| Cash and short-term investments | $2.481 billion | At March 31, 2023 |
| Debt | $646 million total carrying amount, including current maturities | $650 million Term Loan principal; no revolving-credit-facility borrowings |
Operating cash flow rose mainly because of improved receivables collections. Days sales outstanding was 73 days, down from 74 at December 31, 2022. Cash, cash equivalents and short-term investments plus available credit capacity were approximately $4.5 billion. Management expected liquidity sources to cover operating needs and debt service for the next 12 months.
Material changes and operating trends
- Constant-currency growth was led by Health Sciences (+3.5%) and Communications, Media and Technology (+3.9%); Financial Services declined 1.4%, with weakness in banking. Reported segment revenue changes were Financial Services $(52) million, Health Sciences +$41 million, Products and Resources $(12) million, and Communications, Media and Technology +$9 million.
- Reduced discretionary demand affected banking, North American retail and consumer goods, and some North American communications, media and technology clients. Acquisitions contributed about 100 basis points to overall revenue growth.
- Higher delivery compensation costs pressured margins, partly offset by Indian rupee depreciation and prior-year pricing actions. Segment operating profit was $1.006 billion, down from $1.047 billion; unallocated costs were $304 million versus $323 million.
- Voluntary Tech Services attrition declined to 23% for the trailing 12 months from 30%; headcount was approximately 351,500 versus 340,400 a year earlier.
Outlook, risks and unusual items
- The filing does not provide a clear numerical full-year revenue or earnings outlook. Management cited continued client focus on digital transformation, alongside uncertainty in the global economy and demand.
- In Q2 2023, Cognizant initiated the NextGen program to simplify operations, optimize corporate functions and consolidate office space. It expects approximately $400 million in costs: about $350 million in 2023 and $50 million in 2024; approximately 3,500 employees may be affected. Costs and savings are estimates and could differ; restructuring may disrupt operations or employee retention.
- The effective tax rate was 21.4%, down from 23.3%, primarily due to a $25 million discrete tax benefit following an IRS agreement settling tax years 2017 and 2018.
- Indian tax disputes over CTS India share repurchases remain unresolved. The ITD asserts an additional 33 billion rupees (about $402 million) for the 2016 transaction; $60 million was deposited and $360 million of time deposits were under lien. Cognizant recorded no reserve and maintains it paid applicable taxes.
- The India Defined Contribution Obligation accrual remains subject to uncertainty; the company had accrued $117 million in 2019, and the ultimate obligation could differ materially.
- Cognizant continues to pursue a $570 million judgment in the Syntel litigation but will not record a gain until realizable. Other disclosed litigation includes shareholder derivative actions; outcomes and costs are uncertain.
- Q1 acquisitions of OneSource Virtual and Mobica had a preliminary aggregate purchase price of $429 million. The company used $409 million of cash for business combinations during the quarter.
Important facts for investors to verify
- Whether constant-currency growth and demand trends improve, particularly in Financial Services and discretionary client work.
- Actual NextGen charges, timing, employee impact, realized savings and any operational disruption.
- Developments and potential cash exposure in the Indian tax disputes and the India Defined Contribution Obligation.
- Receivables collection, operating cash flow, acquisition spending and the company’s capital-return pace.
- Progress on the Syntel appeal and other litigation; no Syntel judgment gain is recognized in these statements.