Cognizant Technology Solutions Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Cognizant provides consulting, technology, digital and outsourcing services to clients across four industry-based segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $4.906B | $4.585B | $9.732B | $8.986B |
| Revenue growth | 7.0% reported; 9.5% constant currency | 8.3% reported; 10.2% constant currency | ||
| Operating income | $760M | $696M | $1.484B | $1.365B |
| Operating margin | 15.5% | 15.2% | 15.2% | 15.2% |
| Net income | $577M | $512M | $1.140B | $1.017B |
| Diluted EPS | $1.11 | $0.97 | $2.18 | $1.92 |
| Adjusted diluted EPS (non-GAAP) | $1.14 | $0.99 | $2.23 | $1.96 |
Q2 adjusted diluted EPS rose 15.2%; six-month adjusted diluted EPS rose 13.8%. The effective tax rate was 24.2% for Q2 and 23.8% for the first half, down from 26.5% and 25.3%, respectively, primarily due to higher discrete tax benefits related mainly to undistributed foreign earnings.
Q2 revenue growth was led by Communications, Media and Technology (16.1%), Products and Resources (8.1%), Health Sciences (6.3%) and Financial Services (2.7%). Constant-currency growth was higher across the segments. North America generated 74.5% of Q2 revenue. Acquisitions contributed approximately 110 basis points to Q2 revenue growth and 160 basis points to first-half growth; the filing says Cognizant completed no acquisitions in 2022.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $834M, versus $722M a year earlier. Investing activities provided $229M, compared with $1.259B used in the prior-year period; financing activities used $1.050B, compared with $768M used.
- Cash and cash equivalents were $1.768B and short-term investments were $552M at June 30. Cash, cash equivalents and short-term investments totaled $2.320B. The company also reported approximately $1.915B of available credit-facility capacity.
- Total debt was approximately $646M, comprising $38M short-term debt and $608M long-term debt. The $1.750B revolving credit facility had no outstanding borrowings. The credit agreement matures in November 2023; Cognizant reported compliance with its covenants.
- Current assets were $7.023B and current liabilities were $3.153B. The balance sheet showed total assets of $17.258B and stockholders’ equity of $11.950B.
- First-half repurchases totaled $792M and dividends paid were $284M. The company declared a $0.27 per-share dividend payable August 30, 2022. The repurchase program had $1.375B of authorization remaining at June 30.
- Days sales outstanding increased to 74 days, from 71 days a year earlier and 69 days at year-end 2021, as revenue growth outpaced collections.
Material changes and management commentary
- Revenue increased 7.0% in Q2 and 8.3% in the first half, but foreign-exchange movements reduced reported growth relative to constant-currency growth. Growth reflected digital-services demand and acquisition contributions; the sale of Samlink, completed February 1, 2022, weighed on Financial Services and Continental Europe results.
- Q2 operating margin improved 30 basis points year over year. Delivery efficiencies, scale and rupee depreciation helped; higher delivery compensation costs partly offset those benefits. For the first half, operating margin was flat at 15.2%.
- Management cited pricing pressure on non-digital services and elevated competition for skilled workers. Annualized attrition was 35.6% in Q2, versus 31.4% a year earlier; management expected talent and compensation pressures to continue at least through the rest of 2022.
- On July 6, 2022, Cognizant announced a reorganization of practice areas and delivery operations into four integrated practices; the change was not expected to affect reportable segments. The company also changed internal segment-cost allocations in 2022 and recast 2021 comparisons.
- Management stated that operating cash flows, cash and short-term investments, and available revolving credit were expected to cover operating needs, purchase commitments, Tax Reform Act transition-tax payments and debt service over the next 12 months. The filing provides no specific revenue or EPS guidance figure in the supplied text.
Risks, contingencies and unusual items
- India tax disputes: The Indian tax authority asserted an additional 33 billion rupees, or $418M at the June 30 exchange rate, relating to a 2016 CTS India share repurchase. Cognizant reported a negative appeal decision in March 2022, continues to contest the matter and recorded no reserve. It had deposited $63M and had $375M of time deposits under lien. A separate dispute concerning a 2013 transaction remains in litigation, with no specific demand reported.
- India employee contributions: Cognizant had previously accrued $117M for potentially retroactive obligations following a 2019 Supreme Court of India ruling. The ultimate amount remains uncertain and could differ materially from the accrual.
- Syntel litigation: Cognizant obtained a $570M judgment after a post-trial reduction from the jury’s $855M award. Syntel appealed, and execution was stayed pending appeal. Cognizant has not recognized the gain because it is not yet realizable.
- Other disclosed exposures include shareholder derivative actions, legal-fee advancement and indemnification obligations for certain current and former officers and directors, client indemnities, and potential claims involving service delivery, data or contractual obligations. Outcomes and potential amounts are uncertain.
- Russia’s invasion of Ukraine was cited as a source of global uncertainty; Cognizant reported no employees, facilities or significant operations there and immaterial revenue from those countries, but noted possible indirect or wider regional effects.
Most important facts for investors to verify
- Whether demand growth in digital services can offset non-digital pricing pressure and whether segment growth trends persist.
- Whether attrition and compensation costs ease, and whether Cognizant can retain talent and protect operating margins.
- Developments in the $418M Indian tax assessment, the employee-contribution obligation and the Syntel appeal, including any effects on cash flow or earnings.
- Collections and DSO trends, the sustainability of operating cash flow, and the company’s planned balance among repurchases, dividends and investment.
- How foreign exchange movements and hedging affect reported revenue, operating margins and accumulated other comprehensive income.