Cognizant Technology Solutions Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Cognizant provides consulting, digital, technology, application, infrastructure and business-process services across Financial Services, Healthcare, Products and Resources, and Communications, Media and Technology. Its strategy emphasizes digital capabilities, including AI, IoT, digital engineering and cloud.
Financial performance and position
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $16.783 billion | $16.125 billion | +4.1% reported; +5.2% constant currency |
| Operating income | $2.453 billion | $2.801 billion | -12.4% |
| Operating margin | 14.6% | 17.4% | -2.8 percentage points |
| Net income | $1.842 billion | $2.101 billion | -12.3% |
| Diluted EPS | $3.29 | $3.60 | -8.6% |
| Adjusted operating margin | 16.6% | 18.1% | Non-GAAP |
| Adjusted diluted EPS | $3.99 | $4.02 | Non-GAAP |
| Operating cash flow | $2.499 billion | $2.592 billion | -$93 million |
| Cash, cash equivalents and short-term investments | $3.424 billion | $4.511 billion | Includes $414 million restricted in India |
| Total debt | $738 million | $745 million | -$7 million |
| Working capital | $4.628 billion | $5.900 billion | -$1.272 billion |
Fourth-quarter 2019 revenue was $4.284 billion, operating income was $626 million, net income was $395 million, and diluted EPS was $0.72. Fourth-quarter restructuring charges were $101 million.
Cost of revenues rose to 63.4% of revenue from 61.0%, reflecting delivery-personnel costs growing faster than revenue. Cash provided by investing activities was $1.588 billion, largely reflecting net investment sales, partly offset by acquisitions and capital spending; capital expenditures were $392 million. The filing reports no material effect from a 10% interest-rate change. Cognizant had $1.932 billion of available capacity under its credit facilities at year-end.
Material changes and operating drivers
- Revenue growth was led by Products and Resources (+10.4%) and Communications, Media and Technology (+11.5%). Financial Services (+0.4%) and Healthcare (+0.6%) grew only modestly.
- North America generated 75.8% of revenue. Digital demand and acquisitions supported growth, while pricing pressure in core services and certain clients bringing work in-house or moving it to captives were offsets.
- Operating margin declined amid higher delivery costs, acquisition-related dilution, healthcare contract renegotiations and a client dispute, as well as higher restructuring charges and a $117 million accrual for an India defined-contribution obligation.
- Net income also reflected a $57 million impairment of an equity-method investment and a $21 million one-time tax expense following enactment of India’s new tax law. Lower foreign-exchange losses partly offset the operating-income decline.
- Revenue growth includes acquisitions; Cognizant completed five acquisitions in 2019. Revenue from clients added during the year, including acquisitions, was $234 million.
Outlook, management commentary and risks
- Fit for Growth: The plan combines cost optimization with investment in digital capabilities, talent, sales and marketing. Management expects $500–$550 million in annualized gross savings before planned investments; 2020 savings are expected to be below that run rate. Cognizant expects another $100–$150 million of plan charges in 2020, primarily severance and facility-exit costs. It incurred $48 million of Fit for Growth charges in 2019.
- Content-services exit: Cognizant expects to exit certain content-related work in 2020. Management estimates annualized revenue losses of $225–$255 million, with a $180–$200 million impact on 2020 revenue as the work winds down over one to two years; affected client relationships could also be harmed.
- Demand and execution: Management expects continued demand for digital services but cautions that legacy-service pricing pressure, clients moving work in-house, industry consolidation, regulation, trade policy and macroeconomic uncertainty could weigh on demand. The filing does not provide a consolidated numerical 2020 revenue or EPS forecast.
- India matters: The $117 million accrued for the India defined-contribution obligation assumes retroactive application of a court ruling; the ultimate obligation could differ materially. A separate Indian tax-department dispute concerns share repurchases and an asserted additional tax amount of approximately $463 million for the 2016 transaction. No reserve was recorded; $414 million of time deposits was restricted, and the dispute remained unresolved.
- Other risks: Risks include wage inflation and employee attrition, competition and technology change, foreign-exchange exposure, immigration restrictions, cybersecurity and privacy incidents, contract performance claims, tax-law changes, and litigation. Putative securities and shareholder derivative actions remained pending; Cognizant said it could not estimate a possible loss range.
- Capital returns: Cognizant returned $2.609 billion to shareholders in 2019 through repurchases and dividends. In February 2020, the Board raised the quarterly dividend from $0.20 to $0.22 per share and increased the repurchase authorization to $7.5 billion. Future returns remain subject to liquidity, investment needs and other conditions.
Key facts for investors to verify
- Reconcile GAAP results with management’s non-GAAP adjustments, particularly the $217 million of total 2019 restructuring charges and the $117 million India obligation accrual.
- Track whether the Fit for Growth savings are realized after planned investments and whether the content-services exit produces the disclosed revenue decline.
- Review the status, potential cash impact and accounting treatment of the India tax dispute and defined-contribution obligation; distinguish restricted funds from available liquidity.
- Assess the sustainability of revenue growth and margins given segment divergence, client insourcing, pricing pressure, delivery-cost inflation and acquisition dilution.
- Confirm cash-flow generation and the pace of dividends, repurchases and acquisitions against liquidity needs and cash held outside the United States.