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Cognizant Technology Solutions Annual Report, Year Ended Dec 31, 2004

Filing Date
Filed March 16, 2005
Period End
December 31, 2004
Security
CTSH
In the record · 2016–202610-K1110-Q338-K105

CTSH filed 11 annual reports (10-K), 33 quarterly reports (10-Q) and 105 current reports (8-K) between 2016 and 2026.

  1. Material agreement8-K · Feb ’17Feb ’17
  2. FY2018 annual report10-K · Feb ’19Feb ’19
  3. Leadership change8-K · Jun ’21Jun ’21
  4. Leadership change8-K · May ’25May ’25

01—Abstract

Summary

Summary of the 10-K filed March 16, 2005. Cited figures are marked; the original filing is the authoritative source.

Cognizant Technology Solutions (CTSH) closed fiscal 2004 with a strong year of growth and profitability.

Total revenue rose 59.3% to $586.7 milliona from $368.2 million in 2003, and net income more than tripled to $100.2 million, or $0.70 per diluted share, up from $0.42. Income from operations grew 62.7% to $117.6 million, and the operating margin expanded modestly to 20.0% from 19.6%, within management's targeted 19-20% range. Growth was broad-based: active clients rose to 233 from 153, and over 90% of revenue came from customers with one or more years of relationship.

Financial services was the largest segment at 49.5% of revenue, with healthcare at 19.8%, retail/manufacturing/logistics at 18.0%, and other at 12.7%. The balance sheet is debt-free and liquid. Cash, cash equivalents and short-term deposits totaled $314.8 millionb, working capital was $338.9 million, and operating cash flow was $127.3 million.

Stockholders' equity reached $453.5 millionc. The company is expanding its offshore footprint with over 900,000 square feet of new fully-owned development centers in India, budgeted at roughly $76 million, and it closed its Limerick, Ireland center.

Key investor considerations include heavy concentration in India (most technical staff and development centers are there), exposure to U.S. immigration rules affecting H-1B and L-1 visas, potential anti-outsourcing legislation, rising Indian wage costs, and customer concentration, with the top five clients accounting for 38% of revenue and JPMorgan Chase for 13.7%. Management also flagged that the American Jobs Creation Act could allow repatriation of $0 to $500 milliond of Indian earnings in 2005, and that adoption of SFAS 123(R) from July 2005 is expected to significantly reduce future reported earnings.

02—Key points

Key Highlights

  1. Revenue grew 59.3% to $586.7M in 2004 (from $368.2M), with financial services revenue up 70.5% to $290.4M
  2. Net income rose 74.8% to $100.2M; diluted EPS of $0.70 versus $0.42 in 2003
  3. Operating margin widened to 20.0% from 19.6%, within management's 19-20% target range
  4. Client count increased to 233 from 153, and over 90% of revenue came from clients of one year or more
  5. Balance sheet is debt-free with $314.8M in cash and short-term deposits and $338.9M in working capital
  6. Operating cash flow of $127.3M, up from $79.9M, supported by higher earnings and tax benefits from stock options
  7. Major risks include concentration in India, U.S. immigration (H-1B/L-1) changes, potential anti-outsourcing legislation, and top-five customers at 38% of revenue

03—Questions

Frequently Asked Questions

  1. How concentrated is Cognizant's revenue among its customers?

    Fairly concentrated. The top five customers generated 38% of 2004 revenue, and the top ten generated 52%. JPMorgan Chase alone accounted for 13.7%. Management notes that large customers can change their spending from year to year, so losing one could materially affect results.

  2. Why is Cognizant's offshore operation in India so important, and what are the risks?

    The integrated on-site/offshore model relies on India for most technical staff and development centers, which drives its cost advantage. Risks include rising Indian wage inflation (which can compress margins), geopolitical tensions with Pakistan, and changes in Indian tax incentives such as tax holidays that are being phased out by March 2009.

  3. How exposed is the business to U.S. immigration and outsourcing policy?

    Significantly. The vast majority of its U.S. and European technical professionals are Indian nationals who depend on H-1B and L-1 visas. The H-1B cap was reached for fiscal 2005, and changes to L-1 rules take effect June 8, 2005. Potential anti-outsourcing legislation is also under debate in Congress and many state legislatures.

  4. What should investors expect for earnings and cash use going forward?

    The company plans to spend about $76 million on new Indian development centers, with $22 million committed and $14.7 million spent as of year-end. It may repatriate between $0 and $500 million of Indian earnings under the 2004 Jobs Creation Act, subject to further analysis. Also, expensing stock options under SFAS 123(R) from July 1, 2005 is expected to have a significant negative impact on reported results.

04—Continue

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