01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Cognizant Technology Solutions (CTSH) closed fiscal 2008 with strong top-line and earnings growth despite a deteriorating macro backdrop.
Revenue rose 31.9% to $2,816.3 milliona (from $2,135.6 million), and diluted EPS reached $1.44 versus $1.15 in 2007. Operating margin improved to 18.3% from 17.9%, and on a non-GAAP basis (excluding stock-based compensation and Indian fringe benefit tax) it was 20.2%, slightly above the company's targeted 19%-20% range. Growth was broad-based: all four segments grew at least 28%, European revenue rose 57.8%, and the customer count reached about 565.
Net cash from operations was $429.7 millionb, and the company held $762.6 million in cash and short-term investments with no third-party debt. The filing also flags meaningful risks heading into 2009. Management expects a slowing global economy, continued weakness in financial services (45.6% of revenue), and pressure on discretionary application development spending, partly offset by demand for cost-containment work such as maintenance, infrastructure management and BPO.
Fourth-quarter sequential trends in financial services softened. Other risk areas include Indian wage inflation, rupee volatility (a 1%c move in the rupee moves operating margin about 25 basis points), a pending U.S. Department of Labor H-1B investigation, and the expiration of Indian STP tax holidays by March 31, 2010, which management expects to raise the effective tax rate significantly from 2010. Balance sheet items warrant attention.
Roughly $189.2 milliond of investments are auction-rate securities with failed auctions. These are partly protected by a $168.5 million UBS put (the "UBS Right") exercisable from June 2010 to July 2012, and the company recorded a $29.1 million pre-tax loss and a $28.2 million gain related to this transaction.
The company also authorized a $50 million share repurchase program in December 2008 but made no repurchases in the fourth quarter. Management plans to spend roughly $175 million on capital expenditures in 2009, and the stock fell sharply during 2008, with the closing range in Q4 at $14.38 to $22.69.
02—Key points
Key Highlights
- Revenue grew 31.9% to $2.82 billion in 2008, driven by all four business segments growing 28% or more and European revenue up 57.8%.
- Diluted EPS rose to $1.44 from $1.15 (up about 25%), and net income reached $430.8 million; operating margin was 18.3% (20.2% excluding stock-based compensation and Indian fringe benefit tax).
- Financial Services (45.6% of revenue) and Healthcare (24.4%) remain the largest segments; top-five customer concentration fell to 19.4% from 23.9%.
- Strong balance sheet: $762.6 million in cash and short-term investments, no third-party debt, working capital of $1.08 billion, and operating cash flow of $429.7 million.
- Auction-rate securities of about $189 million are illiquid, partly hedged by a $168.5 million UBS Right exercisable in 2010-2012, and generated a net pre-tax loss of about $0.9 million in 2008 from the related transaction.
- Key 2009 headwinds include slowing U.S. and U.K. economies, weak financial services spending, and a planned 2009 capex budget of about $175 million.
- Tax holidays on Indian STPs expire March 31, 2010, which management expects to significantly raise the effective tax rate from 2010 onward (2008 effective rate was 16.4%).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $2.82B$2.14B | +31.9% |
| SG&A Expenses | $652.02M$494.10M | +32.0% |
| Operating Income | $516.67M$381.52M | +35.4% |
| Net Income | $430.85M$350.13M | +23.1% |
| EPS (Basic) | $0.74$0.61 | +22.1% |
| EPS (Diluted) | $0.72$0.57 | +25.2% |
| Shares Outstanding (Basic) | 580.24M576.31M | +0.7% |
| Shares Outstanding (Diluted) | 597.88M607.19M | −1.5% |
05—Questions
Frequently Asked Questions
How did Cognizant perform financially in 2008?
Revenue increased 31.9% to $2,816.3 million and net income increased 23% to $430.8 million. Diluted EPS rose to $1.44 from $1.15. Operating margin improved to 18.3% from 17.9%, helped by the weaker Indian rupee and revenue growth outpacing headcount growth.
What are the biggest risks to Cognizant's 2009 outlook?
Management highlighted a slowing global economy, weakness in financial services (45.6% of 2008 revenue), and pressure on discretionary application development projects. Other risks include Indian wage inflation, currency volatility, the expiration of Indian tax holidays in 2010, and a pending U.S. Department of Labor H-1B investigation. Management expects demand to shift toward cost-containment services such as maintenance, infrastructure management and BPO.
Is Cognizant exposed to the credit crisis through its investments?
Yes, partly. About $189 million of investments were auction-rate securities, backed largely by federally guaranteed student loans, with auctions failing since February 2008. The company holds a $168.5 million UBS Right, which lets it sell these securities at par between June 2010 and July 2012, though its value depends on UBS's ability to perform. The company says it has sufficient liquidity to operate for at least the next 12 months.
Does Cognizant have debt or a capital return program?
Cognizant had no third-party debt at year-end 2008. It repurchased $27.8 million of stock in 2008 under an expired program and authorized a new $50 million buyback in December 2008, expiring in December 2009. No shares were repurchased under the new program in the fourth quarter. The company has never paid cash dividends and does not plan to in the foreseeable future.
How concentrated is Cognizant's customer base and geographic revenue?
Customer concentration is moderate and declining: the top five customers accounted for 19.4% of revenue and the top ten for 30.0% in 2008, with no single customer above 10%. About 79.1% of revenue came from North America and 19.2% from Europe. Cognizant served about 565 active clients at year-end 2008, up from 500.
06—Continue