10-KPeriod: FY2006

COGNIZANT TECHNOLOGY SOLUTIONS CORP Annual Report, Year Ended Dec 31, 2006

Filed February 16, 2007For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial performance for the fiscal year ended December 31, 2006, with revenues reaching $1.42 billion, a significant increase from $885.8 million in the previous year. This growth was primarily driven by robust demand across all business segments, particularly Healthcare and Financial Services, and an expansion of services, including IT consulting, technology services, and business process outsourcing. The company's integrated on-site/offshore business model, heavily leveraging its talent pool in India, remained a key competitive advantage, enabling cost-effective delivery of high-quality services to a growing client base. Despite an increase in operating expenses, partly due to the adoption of new accounting standards for stock-based compensation, Cognizant maintained a healthy operating margin. The company also continued its strategic investments in expanding its global footprint, particularly in Europe, and in developing new service offerings. With a strong balance sheet, ample liquidity, and no third-party debt, Cognizant is well-positioned for continued growth, though potential risks include increasing wage inflation in India, competition, and geopolitical uncertainties.

Key Highlights

  • 1Revenue surged to $1.42 billion in 2006, a 60.8% increase from $885.8 million in 2005, driven by strong demand and service expansion.
  • 2The company's established on-site/offshore delivery model, with a significant presence in India, remains a core strength and a key factor in its growth.
  • 3Healthcare and Financial Services segments were major contributors to revenue growth, demonstrating the company's vertical industry focus.
  • 4Strategic investments in expanding geographic presence (especially Europe) and new service offerings continue, supporting long-term growth.
  • 5The company maintained a strong financial position with significant cash reserves ($648.2 million) and no third-party debt.
  • 6Despite increased operating expenses, including stock-based compensation, the company achieved a healthy operating margin of 18.2% (20.3% excluding stock-based compensation).

Frequently Asked Questions

Cognizant's revenue growth in 2006 was driven by strong demand for its services across all segments, particularly Healthcare and Financial Services. The expansion of its service offerings, increased penetration at existing customers (96% of 2006 revenue came from customers retained from 2005), and a greater presence in the European market were also key contributors.

Cognizant utilizes an integrated on-site/offshore business model, with a significant portion of its technical professionals based in India, to provide cost-effective IT and business process outsourcing services. While this model offers cost advantages, risks include increasing wage inflation in India, competition for skilled talent, and geopolitical uncertainties in the region.

Cognizant's growth strategies include further developing long-term customer relationships, expanding its service offerings and solutions, enhancing its processes and methodologies, expanding its geographic presence (particularly in Europe), continuing to be an employer of choice, and pursuing selective strategic acquisitions and alliances.

The adoption of SFAS No. 123R effective January 1, 2006, required Cognizant to recognize stock-based compensation expense. This resulted in a reported operating margin of 18.2% for 2006, down from 20.1% in 2005. Excluding this stock-based compensation expense, the operating margin was 20.3% in 2006, aligning with the company's historical target range.