Cognizant Technology Solutions Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context and results
Cognizant provides consulting, technology, outsourcing and digital services. Revenue increased 5.1% to $4.11 billion, or 6.8% on a constant-currency basis. Growth was led by Communications, Media and Technology and Products and Resources; North America generated 76% of revenue.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $4,110 | $3,912 | +5.1% |
| Operating income | $539 | $693 | -22.2% |
| Operating margin | 13.1% | 17.7% | -4.6 percentage points |
| Adjusted operating margin (non-GAAP) | 16.0% | 17.7% | -1.7 percentage points |
| Net income | $441 | $520 | -15.2% |
| Diluted EPS | $0.77 | $0.88 | -12.5% |
| Operating cash flow | $269 | $388 | -$119 |
| Free cash flow (non-GAAP) | $163 | $292 | -$129 |
Revenue by segment: Financial Services $1,436 million (-1.7% reported; +0.2% constant currency); Healthcare $1,165 million (+3.9%); Products and Resources $914 million (+11.3%); and Communications, Media and Technology $595 million (+16.9%).
Financial position and capital allocation
- At March 31, cash and cash equivalents were $950 million and short-term investments were $2.718 billion, totaling $3.668 billion; $427 million of restricted Indian time deposits was unavailable for use.
- Debt was $746 million: $19 million short-term and $727 million long-term. The company also had a $1.75 billion undrawn revolving credit facility, maturing in November 2023, and reported compliance with its debt covenants.
- Current assets were $7.883 billion and current liabilities were $2.720 billion. Adoption of the lease standard added operating lease assets of $809 million and operating lease liabilities of $835 million at quarter-end.
- Financing cash outflow was $839 million, including $771 million of share repurchases and $116 million of dividends paid. Management reported $866 million returned to shareholders, comprising $750 million of repurchases and $116 million of dividends.
Material changes, management commentary and outlook
- Profitability weakened as delivery personnel costs grew faster than revenue, with additional pressure from strategic partners and vendors and acquisition-related amortization. GAAP results also included a $117 million accrual for India’s defined contribution obligation. Adjusted operating income excluded that accrual and $2 million of executive transition costs.
- Management attributed lower operating cash flow mainly to the timing of estimated tax payments and the $28 million FCPA-related payment to the DOJ and SEC. The FCPA investigations were resolved, and the DOJ issued a declination letter.
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management expects demand for digital services to remain important and plans continued investment in digital capabilities, talent, new offerings and acquisitions, alongside cost discipline. It also cited customer spending, macroeconomic and regulatory uncertainty, Brexit, industry consolidation, foreign exchange movements and the CEO transition as factors that could affect results.
- CEO Brian Humphries succeeded Francisco D’Souza on April 1, 2019. A $0.20-per-share dividend was declared for payment May 31, 2019.
Risks, contingencies and unusual items
- India contribution obligation: The $117 million accrual assumes retroactive application of a February 2019 Supreme Court of India ruling. The company said the calculation and retroactive application are uncertain; the ultimate obligation may differ materially.
- Indian tax dispute: The Indian Income Tax Department asserts an additional 33 billion rupees, approximately $477 million, relating to the 2016 remittance, alongside a separate dispute concerning a 2013 transaction. Cognizant recorded no reserve, believes applicable taxes were paid, and awaits proceedings before the Madras High Court. A $71 million deposit and $427 million of restricted time deposits relate to the 2016 dispute.
- Litigation: Securities class-action and shareholder derivative matters remain pending; the company said it cannot estimate a possible loss or range. Other ordinary-course claims and customer indemnity obligations could also affect results or cash flows.
- Liquidity and tax: The company considers Indian earnings indefinitely reinvested. It estimated that repatriating approximately $4.872 billion of unrepatriated Indian earnings would incur about $1.023 billion in additional income tax expense. Management expects available resources, excluding restricted assets, to meet requirements for the next twelve months.
Most important facts for investors to verify
- How the India contribution obligation is ultimately calculated, including any retroactive application, interest or penalties.
- Developments in the $477 million Indian tax assessment and the continued restriction of Indian deposits.
- Whether revenue growth can translate into margin recovery after higher delivery costs and the Q1 accrual.
- Cash conversion and working-capital trends, given lower operating cash flow and higher days sales outstanding (78 days versus 75 days at year-end).
- Progress and potential exposure in the securities and derivative litigation, and the impact of the new CEO transition.