Cognizant Technology Solutions Corporation — 2010 Form 10-K
Business and period: The filing covers the fiscal year ended December 31, 2010; it is an annual report, not a standalone fourth-quarter filing. Cognizant provides IT consulting, technology and outsourcing services, primarily to large global companies, using a global delivery model with substantial operations in India. Its reportable segments are Financial Services, Healthcare, Manufacturing/Retail/Logistics and Other.
Financial performance
Amounts are in millions of U.S. dollars except per-share data. Comparisons are with 2009.
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $4,592.4 | $3,278.7 | +40.1% |
| Operating income / margin | $861.9 / 18.8% | $618.5 / 18.9% | Income +39.3%; margin down 0.1 percentage point |
| Net income / net margin | $733.5 / 16.0% | $535.0 / 16.3% | Income +37.1% |
| Diluted EPS | $2.37 | $1.78 | +33.1% |
| Operating cash flow | $764.7 | $672.3 | +$92.3 |
| Capital expenditures | $185.5 | $76.6 | +$108.9 |
Operating cash flow less reported capital expenditures was approximately $579.1 million in 2010. Cash and cash equivalents plus short-term investments totaled $2,226.4 million at year-end; working capital was $2,587.5 million. The company reported no third-party debt. Total assets were $4,583.1 million and stockholders’ equity was $3,584.4 million.
Revenue grew across every segment: Financial Services $1,944.5 million (+38.2%); Healthcare $1,177.1 million (+36.8%); Manufacturing/Retail/Logistics $849.6 million (+50.4%); and Other $621.2 million (+39.1%). Europe revenue rose 41.0% to $855.6 million, with UK revenue up 58.2%. North America accounted for 78.0% of revenue. No single customer exceeded 10% of revenue, although the top five represented 17.9%.
Material changes and notable items
- Revenue growth accelerated from 16.4% in 2009 to 40.1% in 2010, supported by existing-client expansion, discretionary development and post-acquisition integration work, and broader demand for outsourcing. Active clients increased to approximately 712 from 589.
- GAAP operating margin edged down despite higher operating income. Management cited rupee appreciation, compensation and incentive costs, and growth investments; it estimated the rupee’s net adverse operating-margin effect at approximately 66 basis points after designated hedge settlements.
- Management’s non-GAAP operating margin, excluding stock-based compensation, was 20.0%, versus 20.3% in 2009. Stock-based compensation was $57.0 million in 2010.
- Cash flow rose, while trade receivables increased to $901.3 million from $626.3 million. Days sales outstanding, including unbilled receivables, was approximately 71 days, compared with 72 days in 2009.
- The company completed three acquisitions for approximately $46 million net of acquired cash and repurchased $41.9 million of shares under repurchase programs. A new $150 million authorization was approved in December 2010; 600,000 shares had been repurchased under it by year-end.
Outlook, risks and contingencies
Management described the global economy as fragile and did not provide a specific 2011 revenue or earnings forecast in the supplied filing text. It expected to keep investing above its targeted 19%–20% operating-margin range, excluding stock-based compensation and applicable related tax, and forecast approximately $285 million of 2011 capital expenditures. It also planned approximately $500 million of India development-center investment from 2011 through 2014, with about 8 million square feet planned.
Management identified potential normalization of customer IT budgets, continued cost-containment demand, technology and regulatory changes, currency volatility and a higher effective tax rate as factors affecting 2011. Indian Software Technology Park tax holidays were scheduled to expire March 31, 2011; management warned that expiration without replacement benefits could significantly increase the effective tax rate. The 2010 tax provision benefited by approximately $166.8 million from Indian tax holidays and incentives.
Key risks include dependence on North American and financial-services clients; competition and pricing pressure; wage inflation, retention and utilization; fixed-price project estimation and execution; rupee exposure and hedge risk; visa and anti-outsourcing restrictions; data security, service failures and indemnity claims; and legal, political and regulatory risks in countries where Cognizant operates. Fixed-price contracts contributed 31.5% of 2010 revenue. Management considered ordinary-course litigation outcomes unlikely to materially affect results, but noted that maximum exposure under certain indemnities cannot be determined. Contractual obligations included $327.8 million of operating leases and $56.6 million of fixed capital commitments.
The company reported effective disclosure controls and internal control over financial reporting; its auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2011 tax legislation or incentives changed the expected effect of the March 2011 STP tax-holiday expiration.
- Subsequent revenue growth, operating margins and the extent to which currency movements, compensation costs and stock-based compensation affected results.
- Receivables and cash conversion trends as revenue expanded, including collection of unbilled services.
- Realized results and returns from the planned India facility expansion and the 2011 capital-spending program.
- Subsequent acquisition integration, share repurchases and any material developments in litigation, indemnities, data security or visa constraints.