Cognizant Technology Solutions Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Cognizant provides IT, consulting and business-process services. Comparisons are with Q1 2015 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $3,202.0 | $2,911.4 | +10.0% |
| Operating income | $554.0 | $500.3 | +10.7% |
| Operating margin | 17.3% | 17.2% | +0.1 percentage point |
| Net income | $441.2 | $382.9 | +15.2% |
| Diluted EPS | $0.72 | $0.62 | +$0.10 |
| Operating cash flow | $68.8 | $189.3 | −$120.5 |
Net margin increased to 13.8% from 13.2%. Non-GAAP operating margin was 19.9% versus 19.8%, and non-GAAP diluted EPS was $0.80 versus $0.71. These are non-GAAP measures that exclude specified costs; the company targets a 19%–20% non-GAAP operating margin.
Revenue growth was led by Manufacturing/Retail/Logistics (+15.2%), Other (+14.7%) and Financial Services (+10.7%); Healthcare grew 4.0%. North America revenue increased 9.0%, Europe 10.4% and Rest of World 24.9%; the stronger U.S. dollar reduced reported international growth. Consulting and technology services revenue grew approximately 12.9%, compared with 6.2% growth in outsourcing services.
Balance sheet, cash flow and capital allocation
- At March 31, cash and cash equivalents were $1,523.8 and short-term investments were $2,927.9, totaling $4,451.7. Working capital was $5,520.5.
- Total debt was $1,020.9: $162.5 short-term and $858.4 long-term. Debt was down from $1,283.1 at December 31, 2015. The company reported covenant compliance and about $650 of unused revolving-credit capacity.
- Operating cash flow fell to $68.8, which management attributed primarily to higher incentive-compensation payments. Investing activities used $228.4, including $70.5 for business combinations; financing activities used $467.8, including $257.4 of share repurchases and a $250 reduction in revolving-credit borrowings.
- Trade and unbilled receivables rose to $2,319.1 and $432.2, respectively. Days sales outstanding increased to 74 days from 70 at year-end.
- The company repurchased 4.3 million shares for $244.6 under its board-authorized program; $193.3 remained available at quarter-end. It also repurchased about $12.8 of shares for employee tax withholding.
Outlook, management commentary and risks
No specific full-year revenue or EPS guidance is stated in the supplied filing text. Management expects cash, investments, operating cash flow and available credit to cover operating requirements for the next 12 months, and plans continued investment in talent, digital capabilities, delivery capacity, international growth and selective acquisitions. Management said it expects to keep investing amounts above its targeted non-GAAP margin level back into the business.
Management cited demand for digital and transformational projects, discretionary spending and global delivery as growth drivers. It also noted longer sales and ramp-up periods for larger, complex managed-services contracts, healthcare-industry consolidation, macroeconomic pressure on some banking customers, wage and benefit cost increases, and currency volatility. The Indian rupee’s depreciation benefited Q1 operating margin; the company uses currency forwards to hedge some rupee-denominated costs.
Two acquisitions were completed for approximately $69.2 net of cash acquired, expanding digital/cloud infrastructure capabilities and European delivery capacity. The company reported $76.2 of fixed capital commitments for India development-center expansion. Management said existing legal proceedings were not expected to have a material adverse effect, but warned that customer-system failures, data breaches, contractual claims and limitations in insurance coverage could create material exposure. Foreign cash and short-term investments totaled $4,062.7; most could be repatriated but would generally incur U.S. tax, and the company intends to keep these funds invested abroad. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether operating cash flow rebounds after Q1’s compensation payments and the increase in accrued-liability outflows.
- Whether the 74-day DSO and growth in billed and unbilled receivables indicate any deterioration in collection timing.
- Whether Healthcare growth improves despite industry consolidation, and whether banking demand is affected by macroeconomic conditions.
- How wage inflation, incentive compensation and currency movements affect margins; the reported 19.9% non-GAAP margin excludes stock-based compensation and acquisition-related charges.
- Whether planned repurchases and acquisitions remain consistent with liquidity needs, debt obligations and the limited remaining buyback authorization.
- Potential exposure from client-service, privacy, cybersecurity and indemnification claims, and tax consequences if foreign earnings are repatriated.