Cognizant Technology Solutions Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with Q1 2013 unless otherwise noted. Cognizant provides IT, consulting and business process services through industry-focused segments and a global delivery model.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $2,422.3 million | $2,020.7 million | +19.9% |
| Income from operations | $460.0 million | $365.9 million | +25.7% |
| Operating margin | 19.0% | 18.1% | +0.9 percentage points |
| Net income | $348.9 million | $284.2 million | +22.8% |
| Diluted EPS, GAAP | $0.57 | $0.47 | +$0.10 |
| Diluted EPS, non-GAAP | $0.62 | $0.51 | +$0.11 |
| Cash from operating activities | $157.3 million | $73.5 million | +$83.9 million |
Net margin was 14.4%, versus 14.1%. Cost of revenues was 59.1% of revenue, compared with 59.4%. Management attributed margin improvement to revenue growth outpacing headcount growth and the weaker Indian rupee, partly offset by higher compensation and benefits. Non-GAAP figures exclude specified items, including stock-based compensation and acquisition-related charges; non-GAAP EPS also excludes net non-operating foreign-exchange gains or losses.
By segment, revenue growth was 19.7% in Financial Services, 20.8% in Healthcare, 20.2% in Manufacturing/Retail/Logistics and 18.0% in Other. Geographic growth was 16.1% in North America, 35.0% in Europe and 28.4% in Rest of World; European growth benefited partly from 2013 acquisitions.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $1.936 billion and short-term investments were $1.929 billion at March 31, 2014, totaling $3.865 billion.
- Working capital was approximately $4.788 billion. The company reported no third-party debt and said it did not anticipate near-term liquidity issues.
- Operating cash flow was $157.3 million; capital expenditures were $43.3 million, implying approximate operating cash flow less capital expenditures of $114.1 million. Investing activities used $433.7 million, primarily reflecting purchases of investments.
- Current assets were $6.291 billion and current liabilities $1.503 billion. Trade and unbilled receivables totaled approximately $1.971 billion; days sales outstanding, including unbilled receivables, was 73 days.
- During the quarter, the company repurchased 600,000 shares for $29.3 million under its authorization; $472.8 million remained available. It also repurchased shares for employee tax withholdings.
- $2.195 billion of cash, cash equivalents and short-term investments was held by foreign subsidiaries. Cognizant intended to indefinitely reinvest foreign earnings, subject to potential U.S. tax if repatriated.
Material changes, outlook and risks
Revenue increased across all segments and regions. Consulting and technology services revenue rose 23.7%; outsourcing revenue rose 16.1%. The company ended the quarter with approximately 1,223 active clients and 178,600 employees. The effective tax rate increased to 26.3% from 24.6%, mainly due to earnings mix and a scheduled reduction in certain Indian tax-holiday benefits. Cognizant completed a two-for-one stock split in March 2014; share and per-share figures were retroactively adjusted.
Management described continued demand for cost-containment work as well as innovation-related services, and planned continued investment in talent, service offerings and international expansion, with selective acquisition opportunities and cost discipline. It targets a 19%–20% non-GAAP operating margin and said it generally reinvests profitability above that range. It expected operating cash flow and cash resources to meet requirements for the next twelve months. The filing provides no specific full-year revenue or EPS guidance.
Key risks include foreign-exchange movements and hedge performance, Indian wage inflation and tax incentives, competition and pricing pressure, client concentration and short-notice contract termination, fixed-price project cost overruns, employee retention and immigration restrictions, cybersecurity and data-protection exposures, and acquisition integration. Fixed-price contracts represented approximately 35.9% of Q1 revenue. Existing legal claims were not expected by management to have a material adverse effect, but indemnification exposure is not quantifiable. Fixed capital commitments for Indian development-center expansion were approximately $47.7 million.
Cash-flow hedges had a $228.2 million net unrealized loss at quarter-end; $115.3 million, net of tax, was expected to be reclassified into earnings within twelve months. A 10% exchange-rate change was estimated to alter the fair value of these hedges by approximately $168.7 million. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subsequent results sustain revenue growth and the targeted non-GAAP margin, and how non-GAAP adjustments compare with GAAP results.
- How rupee movements, hedge settlements and hedge maturities affect operating costs, margins and accumulated losses.
- Whether receivables, unbilled balances and cash conversion remain controlled as revenue expands.
- The durability of growth in Europe and other regions, including the contribution from acquisitions, and any concentration or contract-renewal changes.
- Developments in Indian tax benefits, wage costs, immigration rules, client claims and data-security exposures.