01—Abstract
Summary
Summary of the 10-K filed February 23, 2011. Cited figures are marked; the original filing is the authoritative source.
Cognizant Technology Solutions (CTSH) closed fiscal 2010 with a very strong year: revenue rose 40.1% to $4,592.4 milliona from $3,278.7 million, and net income increased 37.1% to $733.5 million, or $2.37 per diluted share.
Growth was broad-based across all four vertical segments, with Manufacturing/Retail/Logistics up 50.4%, Other up 39.1%, Financial Services up 38.2% and Healthcare up 36.8%. Revenue from European customers rose 41.0% to $855.6 millionb, with the UK up 58.2%. Total headcount reached roughly 104,000, up about 25,600 in the year, and active clients grew to approximately 712 from 589.
Profitability was steady rather than expanding. Income from operations reached $861.9 millionc, but operating margin slipped slightly to 18.8% from 18.9%. Management attributed the pressure to Indian rupee appreciation, which cut operating margin by about 157 basis points, along with higher compensation costs.
Excluding stock-based compensation, the operating margin was 20.0%, within the company's stated 19% to 20% target range. Net foreign exchange results turned to a loss of $9.9 milliond, versus a gain in 2009, and the effective tax rate edged up to 16.5%. The balance sheet is conservative.
Cash and short-term investments totaled $2,226.4 million, the company carried no third-party debt, and working capital was $2,587.5 million. Operating cash flow was $764.7 million.
Investors should weigh several forward risks disclosed in the filing: the expiration of Indian software technology park tax holidays on March 31, 2011, which will raise the effective tax rate; continued wage inflation in India; a planned roughly $500 million India facilities program through 2014; and ongoing U.S. anti-outsourcing and H-1B visa policy risk. Management expects about $285 million of 2011 capital expenditures.
02—Key points
Key Highlights
- Revenue grew 40.1% to $4.59 billion in 2010, with growth in every business segment and strong gains in Europe (up 41.0%, UK up 58.2%).
- Net income rose to $733.5 million, or $2.37 per diluted share, up from $1.78 in 2009.
- Operating margin was 18.8% (20.0% excluding stock-based compensation), slightly below 2009 despite rupee appreciation weighing on results by about 157 basis points.
- Balance sheet strength: $2.23 billion in cash and short-term investments, no third-party debt, and $2.59 billion in working capital.
- Operating cash flow of $764.7 million, supported by higher net income and incentive compensation accruals, with days sales outstanding of about 71 days.
- Headcount grew by roughly 25,600 to about 104,000, and active clients rose to about 712, while 97% of 2010 revenue came from clients who were customers at the end of 2009.
- Key 2011 headwind: Indian STP tax holidays expire March 31, 2011, which management expects to significantly increase the effective tax rate, alongside planned capex of about $285 million and a $150 million buyback authorization.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 23, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $4.59B$3.28B | +40.1% |
| SG&A Expenses | $972.09M$721.36M | +34.8% |
| Operating Income | $861.85M$618.49M | +39.3% |
| Net Income | $733.54M$534.96M | +37.1% |
| EPS (Basic) | $1.22$0.91 | +34.1% |
| EPS (Diluted) | $1.19$0.89 | +33.1% |
| Shares Outstanding (Basic) | 601.56M586.61M | +2.5% |
| Shares Outstanding (Diluted) | 618.27M602.23M | +2.7% |
05—Questions
Frequently Asked Questions
What drove Cognizant's revenue growth in 2010?
Revenue rose 40.1% to $4,592.4 million. Management cited broader acceptance of the global delivery model, increased post-acquisition integration and discretionary development spending, and greater penetration of the European market. Revenue from existing customers grew about $1,193 million, while new customers contributed about $120 million.
Is Cognizant's margin under pressure?
Operating margin edged down to 18.8% from 18.9%. The decline reflects rupee appreciation against the U.S. dollar, higher compensation costs and growth investments, partly offset by operating leverage. Excluding stock-based compensation, margin was 20.0%, within the company's 19% to 20% target range, and management expects to keep reinvesting above that level in 2011.
What tax risk should investors watch in 2011?
The tax holidays on most of Cognizant's Indian software technology park facilities expire March 31, 2011. Export profits from those sites will then be taxed at India's statutory rate of 33.22%, which management expects to raise the effective tax rate significantly beginning in 2011. Newer facilities in Special Economic Zones retain incentives for up to 15 years.
How strong is Cognizant's financial position?
Very strong. The company held $2,226.4 million in cash and short-term investments, carried no third-party debt, and had $2,587.5 million in working capital at year-end 2010. Management said it does not anticipate near-term liquidity issues.
What are the main risks to the business model?
The filing highlights concentration in India-based operations, rupee and wage-cost pressure, U.S. anti-outsourcing and H-1B/L-1 visa restrictions, client concentration in North America (78% of revenue) and financial services (42.4% of revenue), and the fact that most contracts can be terminated on short notice. Fixed-price contracts, which were 31.5% of revenue, add cost-overrun risk.
06—Continue