Cognizant Technology Solutions Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results. Comparisons are with Q1 2020 unless noted. Amounts are in U.S. dollars.
Business context and results
Cognizant provides consulting, technology, outsourcing and digital services. It reported continued demand for digital transformation, including cloud, mobile workplace, e-commerce, automation and AI. North America represented 74.6% of revenue.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $4.401 billion | $4.225 billion | +4.2%; +2.4% constant currency |
| Operating income / margin | $669 million / 15.2% | $579 million / 13.7% | +$90 million / +1.5 percentage points |
| Net income | $505 million | $367 million | +37.6% |
| Diluted EPS | $0.95 | $0.67 | +$0.28 |
| Adjusted operating margin | 15.2% | 15.1% | +0.1 percentage point |
| Adjusted diluted EPS | $0.97 | $0.96 | +$0.01 |
| Operating cash flow | $181 million | $497 million | -$316 million |
Adjusted measures and constant-currency growth are non-GAAP measures. GAAP margin benefited from the absence of 2020 restructuring charges; adjusted margin excludes specified unusual items. The 2021 effective tax rate was 24.1%, versus 27.8% in 2020, including a $14 million discrete tax benefit from an IRS settlement.
Segments and material changes
- Financial Services: revenue $1.458 billion, up 0.5% reported and down 1.7% constant currency; clients continued to optimize legacy systems, weighing on non-digital services.
- Healthcare: revenue $1.288 billion, up 7.9% reported and 7.0% constant currency, driven by healthcare and pharmaceutical demand.
- Products and Resources: revenue $998 million, up 4.6% reported and 2.4% constant currency. Manufacturing, logistics, energy and utilities growth was partly offset by pandemic-related weakness in retail, consumer goods, travel and hospitality.
- Communications, Media and Technology: revenue $657 million, up 5.0% reported and 3.1% constant currency. Exiting certain content services reduced overall company growth by 90 basis points.
Acquisitions contributed 310 basis points to revenue growth. Linium and Magenic were acquired during the quarter for aggregate purchase prices of $330 million, inclusive of contingent consideration. No restructuring costs were recorded in Q1 2021, compared with $55 million in Q1 2020.
Cash, debt and liquidity
- Cash and cash equivalents were $1.973 billion at March 31, 2021, down from $2.680 billion at year-end. Cash, cash equivalents and short-term investments totaled $2.158 billion.
- Operating cash flow was $181 million; investing cash outflow was $538 million, including $310 million for business combinations; financing cash outflow was $340 million. The operating cash flow decline reflected higher incentive compensation payments and tax payments deferred in 2020.
- Debt included $38 million of current maturities and $654 million of long-term debt, net of financing costs. The $1.75 billion revolving credit facility had no borrowings outstanding; approximately $1.928 billion of credit capacity was available. Debt covenants were met.
- Working capital facility in India: $178 million equivalent available; no amount had been drawn at quarter-end. Management expected operating cash flow, cash and investments, and available credit to cover operating needs and debt service for the next 12 months.
- Returned $362 million to shareholders in the quarter: $234 million of share repurchases and $128 million of dividends. The board approved a further $0.24-per-share dividend in May.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management described strategic priorities of growing digital services, expanding internationally, repositioning the brand and increasing client relevance; it also expected to continue pursuing acquisitions and investments. Demand for digital services remained favorable, while pricing pressure on non-digital work and pandemic effects on certain industries could persist.
- Management reported annualized attrition of 21.0% and significantly elevated voluntary attrition in March and April 2021. Competition for skilled employees could constrain delivery capacity, revenue potential and margins and increase hiring and retention costs.
- A sharp increase in COVID-19 cases in India could challenge service delivery because a significant majority of operations and technical personnel are located there. Pandemic-related demand weakness could continue in affected client industries.
- The Indian Income Tax Department asserted an additional $451 million related to the 2016 share repurchase transaction and is also disputing a 2013 transaction. Cognizant disputes the claims, has recorded no reserve, and had $404 million in restricted time deposits plus a $68 million deposit with the tax authority at quarter-end.
- Cognizant had accrued $117 million in 2019 for potential retroactive costs under India’s defined contribution obligation; the ultimate liability remains uncertain and could differ materially.
- In a separate Syntel litigation matter, a post-quarter court order on April 20, 2021 reduced Cognizant’s jury award from $855 million to $570 million. Cognizant said it would not recognize the gain until realizable and expected an appeal.
- Other disclosed exposures include securities class-action and shareholder derivative litigation, cybersecurity and client-service claims, and contractual indemnities. The company could not estimate a possible loss for the class-action and derivative matters.
Most important facts for investors to verify
- Whether reported growth and margin improvement are sustained after acquisition contributions, pandemic-related cost savings and foreign-exchange effects.
- Whether elevated employee attrition affects staffing, delivery capacity, wage costs and client demand fulfillment.
- Cash conversion and liquidity trends, including the effect of compensation and tax-payment timing and acquisition spending.
- Developments in the Indian tax disputes and the defined contribution obligation, including restrictions on deposits and any change in recorded reserves.
- The appeal and final judgment in the Syntel case, and any subsequent change in the status or value of the award.