Cognizant Technology Solutions Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results. Cognizant provides professional and technology services, including consulting, digital services, application development and outsourcing.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4.857B | $4.744B | $14.589B | $13.730B |
| Income from operations | $798M | $729M | $2.282B | $2.094B |
| Operating margin | 16.4% | 15.4% | 15.6% | 15.3% |
| Net income | $629M | $544M | $1.769B | $1.561B |
| Diluted EPS | $1.22 | $1.03 | $3.40 | $2.96 |
| Operating cash flow | Not separately presented for the quarter | $1.866B | $1.670B |
Q3 revenue grew 2.4% year over year, or 5.6% in constant currency; nine-month revenue grew 6.3%, or 8.6% in constant currency. Q3 adjusted operating income was $798M and adjusted operating margin 16.4%, versus $749M and 15.8% a year earlier. Adjusted diluted EPS was $1.17 versus $1.06. These are non-GAAP measures; adjusted EPS excludes, among other items, a Q3 2022 tax benefit and non-operating foreign-exchange gains or losses.
For the nine months, operating cash flow was $1.866B. Investing activities used $28M and financing activities used $1.508B, including $1.107B of share repurchases and $425M of dividends paid. Cash and cash equivalents were $2.042B at September 30, up from $1.792B at year-end.
At September 30, cash, cash equivalents and short-term investments totaled $2.731B. Long-term debt was $636M, with no short-term debt reported. Cognizant reported approximately $1.909B of available capacity under credit facilities. Total assets were $17.347B and total liabilities $5.389B.
Material changes and operating drivers
- Q3 revenue growth was strongest in Communications, Media and Technology (+6.0%; +10.4% constant currency) and Products and Resources (+3.7%; +8.2% constant currency). Financial Services revenue declined 1.5% reported but grew 1.6% constant currency; Health Sciences grew 3.8% reported and 5.5% constant currency.
- Management attributed growth to client adoption of digital technologies and pricing improvements. The Samlink subsidiary sale reduced Q3 growth by 60 basis points; acquisitions added 40 basis points.
- Q3 cost of revenues rose 4.5%, faster than revenue, as a share of revenue increased to 63.4% from 62.1%. Management cited delivery compensation costs, partly offset by delivery efficiencies and rupee depreciation. SG&A fell 9.3%, reflecting scale benefits, foreign exchange and expense optimization.
- Q3 net income increased 15.6%, supported by higher operating income and a lower effective tax rate. The Q3 effective tax rate was 22.5%, compared with 25.6% in 2021; the nine-month rates were 23.3% and 25.4%, respectively.
- Foreign-currency translation and cash-flow hedge losses reduced nine-month comprehensive income; accumulated other comprehensive loss was $511M at September 30, compared with income of $37M at year-end 2021.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or EPS guidance. Management expects talent attraction and retention challenges, elevated compensation costs and related delivery pressures to continue at least through the remainder of 2022. Q3 annualized attrition was 34.9%, down from 37.0% a year earlier; headcount was approximately 349,400.
- Management noted uncertainty from the global economy, regulatory changes, geopolitical conditions and client demand. Cognizant reported no employees, facilities or significant operations in Russia or Ukraine, and immaterial revenue from clients in those countries, while warning that wider or prolonged conflict could affect operations, clients, vendors or subcontractors.
- A $36M tax benefit recognized in Q3 related to a previously unrecognized uncertain tax position. Cognizant is disputing Indian tax assessments related to CTS India share repurchases: the 2016 matter involves a disputed demand of about $405M. The company has deposited $61M and has $363M of time deposits under lien; it recorded no reserves and says it believes applicable taxes were paid. The 2013 matter remains in litigation, with no specific demand reported.
- Cognizant’s appeal-related Syntel litigation award was $570M after the trial court reduced the jury award; execution was stayed pending appeal. The company said it would not recognize a gain until realizable.
- In October 2022, after quarter-end, Cognizant refinanced its debt with a $650M term loan and a $1.85B revolving facility, both maturing in October 2027. In November, it announced a proposed approximately $120M OneSource Virtual acquisition and increased its share-repurchase authorization to $11.5B. The board also declared a $0.27-per-share dividend payable November 29, 2022.
- Management said disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether constant-currency growth, pricing and digital-services demand persist, particularly amid macroeconomic uncertainty.
- Whether hiring and attrition pressures continue to raise delivery costs or constrain the ability to meet client demand.
- Developments in the Indian tax disputes, including the status of the $405M disputed 2016 assessment and related deposits and liens.
- Outcomes of the Syntel appeal and shareholder derivative litigation, and potential costs from indemnification obligations.
- Execution of the debt refinancing, proposed acquisition and expanded repurchase authorization, alongside cash generation and capital returns.