Cognizant Technology Solutions Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Cognizant provides technology and professional services, including digital, consulting, application, infrastructure and business-process services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $4.585 billion | $4.000 billion | $8.986 billion | $8.225 billion |
| Revenue growth | 14.6% reported; 12.0% constant currency | 9.3% reported; 7.1% constant currency | ||
| Operating income | $696 million | $467 million | $1.365 billion | $1.046 billion |
| Operating margin | 15.2% | 11.7% | 15.2% | 12.7% |
| Adjusted operating margin | 15.2% | 14.1% | 15.2% | 14.6% |
| Net income | $512 million | $361 million | $1.017 billion | $728 million |
| Diluted EPS | $0.97 | $0.67 | $1.92 | $1.34 |
| Adjusted diluted EPS | $0.99 | $0.82 | $1.96 | $1.78 |
All four segments grew revenue in Q2: Financial Services 7.6%, Healthcare 14.5%, Products and Resources 21.7%, and Communications, Media and Technology 21.2%. Acquisitions contributed approximately 390 basis points to Q2 revenue growth. North America represented 73.5% of quarterly revenue.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $722 million, down from $1.476 billion. Management attributed the decline mainly to COVID-era tax-payment deferrals remitted in 2021 and higher incentive compensation payments.
- Investing cash outflow was $1.259 billion, including $658 million of net acquisition payments. Financing cash outflow was $768 million. Cash and cash equivalents fell to $1.368 billion from $2.680 billion at year-end 2020.
- Cash, cash equivalents and short-term investments totaled $1.850 billion; available capacity under credit facilities was approximately $1.925 billion. The company reported no revolver borrowings and $683 million of debt, including current maturities. Debt covenants were met.
- Current assets were $6.451 billion and current liabilities $3.183 billion. Trade receivables were $3.419 billion; days sales outstanding were 71, versus 70 at year-end and 77 a year earlier.
- First-half repurchases and dividends totaled $815 million, including shares acquired through stock-based compensation plans. The quarterly dividend was $0.24 per share; a further $0.24 dividend was declared after quarter-end.
Changes, outlook and management commentary
Revenue, operating income and net income rose year over year, while operating margins improved. The comparison benefited from pandemic- and ransomware-related disruption to 2020 revenue and costs, and from the absence of 2020 restructuring and COVID-19 charges. Cost-optimization savings supported 2021 margins; acquisitions, brand and sales investments, and core IT modernization costs partly offset the benefit. Non-digital services continued to face pricing pressure.
Management highlighted demand for cloud, mobile workplace solutions, e-commerce, automation, AI and digital transformation. It intends to continue strategic acquisitions and investments, but provided no specific numerical revenue or earnings guidance in the supplied filing text. The company reported annualized Q2 attrition of 31.4%, with voluntary attrition significantly elevated; management expects recruitment and retention efforts to increase delivery costs in the rest of 2021 and may constrain its ability to meet demand.
Risks, contingencies and unusual items
- India tax dispute: The Indian tax authority asserts an additional 33 billion rupees, about $444 million, relating principally to a 2016 share repurchase transaction, with a separate dispute involving a 2013 transaction. Cognizant believes it paid applicable taxes and recorded no reserve. At June 30, $397 million of time deposits were under lien and $67 million had been deposited with the tax authority.
- Syntel litigation: A $570 million judgment in Cognizant’s favor was stayed pending Syntel’s appeal. Cognizant will not recognize the gain until realizable.
- Other legal matters: Securities class-action and shareholder derivative litigation remain unresolved; the company said it could not reasonably estimate a possible loss. A $117 million accrual was recorded in 2019 for potential prior-period Indian defined-contribution obligations; the ultimate amount could differ materially.
- Customer engagement settlement: Cognizant settled with two of three customers in a large Financial Services engagement in Continental Europe. Negotiations with the third customer remained ongoing, with possible further financial and cash-flow impacts.
- Other material risk factors include COVID-19 effects, particularly in India and in affected client industries; intense competition for skilled employees; foreign-exchange exposure; cyber and service-delivery risks; and potential tax, regulatory and litigation costs.
Key investor verification points
- Assess how much revenue growth is organic and sustainable after acquisition contributions and the prior-year pandemic and ransomware comparison effects.
- Track attrition, hiring costs, non-digital pricing pressure and whether margin improvement persists as growth investments and acquisition costs continue.
- Monitor operating cash conversion, working-capital needs, acquisition spending, capital returns and the use of available credit capacity.
- Follow developments in the India tax dispute, Syntel appeal, defined-contribution obligation and unresolved customer settlement.
- Distinguish GAAP results from adjusted and constant-currency measures, which are non-GAAP metrics.