Cognizant Technology Solutions Corporation — Q1 2022 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Cognizant provides consulting, technology and outsourcing services across Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $4.826 billion | $4.401 billion | +9.7%; +10.9% constant currency |
| Operating income / margin | $724 million / 15.0% | $669 million / 15.2% | Income +8.2%; margin down 0.2 percentage points |
| Net income / net margin | $563 million / 11.7% | $505 million / 11.5% | Net income +11.5% |
| Diluted EPS | $1.07 | $0.95 | +12.6% |
| Adjusted diluted EPS, non-GAAP | $1.08 | $0.97 | +11.3% |
| Operating cash flow | $306 million | $181 million | +$125 million |
| Cash and cash equivalents | $2.192 billion | $1.792 billion at Dec. 31, 2021 | Quarter-end balance |
| Total debt, carrying value | Approximately $655 million | Approximately $664 million at Dec. 31, 2021 | Includes current maturities |
Cash, cash equivalents and short-term investments totaled $2.319 billion at quarter-end. Management reported approximately $1.921 billion of available capacity under credit facilities and no balance drawn on the revolving facility. Capital expenditures were $120 million; operating cash flow less capital expenditures was approximately $186 million. DSO was 72 days, versus 70 days a year earlier and 69 days at year-end 2021.
Revenue rose across all segments: Financial Services +4.8%, Healthcare +8.1%, Products and Resources +13.2%, and Communications, Media and Technology +18.1%. Acquisitions contributed approximately 220 basis points to overall revenue growth. North America represented 74.0% of revenue.
Material changes and management commentary
- Growth reflected continued client demand for digital services; management cited cloud, data, digital content, connected vehicles, supply-chain modernization and life-sciences digitization. Non-digital services continued to face pricing pressure.
- Operating margin declined as higher delivery compensation costs outweighed some benefits from delivery efficiencies, scale and lower incentive compensation. The weaker Indian rupee benefited margin; management estimated each additional 1% currency-rate change would move operating margin by about 20 basis points.
- Annualized employee attrition increased to 30.8% from 21.0% in Q1 2021. Management expects elevated attrition and related recruitment and compensation costs to continue.
- Operating cash flow improved year over year, primarily due to higher operating income and the timing of certain tax payments. Investing cash flow was positive largely because of net investment maturities; financing cash outflow increased, mainly due to higher share repurchases.
- The company repurchased $444 million of shares under its repurchase program and declared dividends of $0.27 per share during the quarter.
Outlook, risks and contingencies
The filing describes strategic priorities and demand trends but does not provide a specific numerical revenue or earnings forecast in the supplied text. Management expects client digital-transformation needs to remain supportive, while warning that talent competition, elevated attrition, compensation inflation and non-digital pricing pressure may weigh on margins and growth. It expects available cash, operating cash flow and credit capacity to fund operating needs and debt service over the next 12 months.
- India tax dispute: The Indian tax department asserted an additional 33 billion rupees, approximately $435 million, relating to a 2016 subsidiary share repurchase. The company received an adverse appeals decision in March 2022, continues to contest the matter and recorded no reserve. A $65 million deposit and $389 million of time deposits under lien were reported.
- Other India obligation: The company had previously accrued $117 million for potentially retroactive statutory employee contribution obligations; the ultimate amount remains uncertain.
- Litigation: The company’s $570 million Syntel judgment remained under appeal; Cognizant said it would not recognize the gain until realizable. Putative shareholder derivative actions continued. The securities class-action settlement had received final approval in December 2021; the company recorded a $20 million loss in 2021 after insurance coverage.
- Geopolitical and operating risks: Russia and Ukraine were not significant operating locations or revenue sources, but broader conflict could affect the company, clients, vendors or subcontractors. Other cited risks include cyber/security incidents, client claims, regulation and tax changes.
Management stated that disclosure controls were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and demand remain broad-based, and how much future growth depends on acquisitions, foreign exchange and digital services.
- Whether attrition and compensation inflation persist and further pressure operating margins.
- Developments in the India tax disputes, including the potential exposure and restrictions on deposits.
- Progress and possible costs of the Syntel appeal and ongoing derivative litigation.
- Cash conversion, receivables/DSO, capital returns and continued access to credit capacity.