01—Abstract
Summary
Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.
Cognizant Technology Solutions (CTSH) reported a strong fiscal 2003 in its first 10-K following its February 2003 split-off from IMS Health, which had previously owned 55.3%a of the company and 92.5% of its voting power.
Total revenue rose 60.7% to $368.2 millionb from $229.1 million, driven by growth in application maintenance and development services, with North America contributing 88% of revenue. Net income increased 66% to $57.4 million, or $0.84 per diluted share, though gross margin contracted from 46.4% to 45.8%, mainly due to rupee appreciation against the dollar. Operating margin held near 19.6%, in line with the company's stated 19–20% target.
Cash rose to $194.2 millionc and the company carries no significant third-party debt, giving it ample liquidity to fund a planned $42.5 million expansion of its Indian development centers. The filing also highlights meaningful risk concentration. Operations and most technical staff are based in India, exposing the company to Indian political and economic developments, wage inflation, and the April 2004 Indian elections.
U.S. immigration rules (H-1B cap reached, tighter L-1 processing) and potential anti-outsourcing legislation could constrain staffing, and the company has not hedged currency exposure. JP Morgan Chase accounted for 10.1%d of revenue, and the top five customers for 36%.
Investors should also note contingent legacy liabilities from the 1996 Dun & Bradstreet/Cognizant Corporation split-up, including a pending Information Resources antitrust suit seeking more than $350 million before trebling, along with indemnification obligations tied to the IMS Health exchange offer. Overall, the filing presents a company with accelerating growth, expanding margins at the net level from a lower effective tax rate (20.6% versus 23.4%), and a strong balance sheet, offset by concentrated offshore operations, labor-market and regulatory exposure, and legacy contingent liabilities that remain relevant to valuation.
02—Key points
Key Highlights
- Revenue grew 60.7% to $368.2 million in 2003, up from $229.1 million in 2002, with North America representing 88% of revenue.
- Net income rose to $57.4 million ($0.84 diluted EPS) from $34.6 million ($0.54), aided by a lower effective tax rate of 20.6% versus 23.4%.
- Gross margin declined modestly to 45.8% from 46.4%, primarily due to rupee appreciation; operating margin was steady at 19.6%, within the 19–20% target range.
- Cash and equivalents reached $194.2 million with no significant third-party debt, supporting planned capital spending of about $42.5 million for three new Indian development centers.
- Headcount grew to roughly 9,240 professionals, including about 8,500 programmers, with the majority based in India, creating exposure to wage inflation and Indian policy changes.
- Customer concentration remains notable: JP Morgan Chase represented 10.1% of 2003 revenue and the top five customers 36%; the company generally lacks long-term contracts.
- Legacy liabilities from the 1996 Dun & Bradstreet/Cognizant Corporation split-up and the IMS Health exchange offer could create contingent exposure, including a pending Information Resources antitrust claim seeking over $350 million before trebling.
03—Questions
Frequently Asked Questions
How did Cognizant's financial performance look in 2003?
Revenue increased 60.7% to $368.2 million and net income grew to $57.4 million, or $0.84 per diluted share, from $34.6 million, or $0.54, in 2002. Operating income rose 60% to $72.3 million, and the operating margin held at about 19.6%, consistent with management's target range of 19–20%.
What are the main risks tied to Cognizant's offshore model?
Most technical staff and development centers are in India, so the company is exposed to Indian political instability (including the April 2004 elections), rising Indian wages that could compress margins, and potential hostilities with Pakistan. Cognizant has not hedged its rupee exposure, and changes in Indian tax incentives could materially affect results.
How dependent is Cognizant on U.S. immigration policy?
Heavily. The vast majority of its IT professionals in the U.S. and Europe are Indian nationals who rely on H-1B and L-1 visas. The H-1B cap was reached in February 2004, and tighter L-1 processing and proposed restrictions could limit its ability to staff U.S. projects. Management states it has visa-ready employees for expected 2004 growth.
Does Cognizant have any significant debt or liquidity concerns?
No. The company reports no significant third-party debt, $194.2 million in cash, and working capital of $215.9 million. Operating cash flow was $79.9 million in 2003. Management believes these resources are sufficient for at least the next 12 months, including the planned $42.5 million development center expansion.
What legacy liabilities could affect Cognizant's investors?
Cognizant has undertaken joint and several liability for certain obligations from the 1996 split-up of Dun & Bradstreet and Cognizant Corporation. The most notable is a pending Information Resources Inc. antitrust suit seeking over $350 million before trebling, though IMS Health has agreed to indemnify Cognizant for these undertakings. The company also faces potential indemnification exposure tied to the IMS Health exchange offer's tax treatment.
04—Continue