01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
Cognizant Technology Solutions (CTSH) closed 2012 with revenue of $7,346.5 milliona, up 20.0% from $6,121.2 million in 2011, and net income of $1,051.3 million, or $3.44 per diluted share, up from $2.85.
Growth was broad-based across segments: Financial Services rose 20.5% to $3,035.4 millionb, Healthcare 19.3% to $1,934.9 million, Manufacturing/Retail/Logistics 25.2% to $1,498.7 million, and Other 12.0% to $877.5 million. North America grew 21.5% and represented 79.4% of revenue. Management says demand is driven by a shift toward global delivery models, discretionary project spending, and expansion of IT infrastructure and BPO services.
Profitability held steady. GAAP operating margin was 18.5%c versus 18.6% in 2011, and non-GAAP operating margin excluding stock-based compensation was 20.0%, in line with the company's historical 19% to 20% target range. Management attributed the slight margin dip to growth investments, partly offset by a weaker Indian rupee and cash flow hedge losses.
The company is also investing heavily in India real estate, with about $400 milliond planned for 2013 capital expenditures. The balance sheet is strong. Cash, cash equivalents and short-term investments totaled $2,863.8 million, the company has no third-party debt, and it repurchased about $486 million of stock in 2012 (cash flow statement shows $520.8 million).
Operating cash flow was $1,172.6 million. Key risks include concentration in Financial Services (41.3% of revenue) and North America, rising Indian wage costs, H-1B and L-1 visa restrictions, anti-outsourcing legislation, and foreign exchange exposure. The company also carries a net unrealized loss of $296.6 million on its rupee hedges, which is a mark-to-market figure and not an operating loss.
02—Key points
Key Highlights
- Revenue rose 20.0% to $7.35 billion in 2012, with all four business segments growing and North America up 21.5%.
- Diluted EPS increased to $3.44 from $2.85, a 20.7% increase, and net income reached $1.05 billion.
- GAAP operating margin was 18.5% (vs. 18.6% in 2011); non-GAAP margin excluding stock-based compensation held at 20.0%, within the 19% to 20% target range.
- Cash, cash equivalents and short-term investments were $2.86 billion with no third-party debt; operating cash flow was $1.17 billion.
- Approximately 98% of 2012 revenue came from clients who were also customers at the end of 2011, and the client base grew to 821 active clients with 214 strategic clients.
- Top five and top ten customers represented 14.0% and 25.0% of revenue, respectively, and no single customer exceeded 10%.
- The company repurchased about $486 million of stock during 2012 under a $1.0 billion authorization that runs through December 31, 2013.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $7.35B$6.12B | +20.0% |
| SG&A Expenses | $1.56B$1.33B | +17.2% |
| Operating Income | $1.36B$1.14B | +19.8% |
| Interest Expense | $0— | — |
| Net Income | $1.05B$883.62M | +19.0% |
| EPS (Basic) | $1.74$1.46 | +19.6% |
| EPS (Diluted) | $1.72$1.43 | +20.7% |
| Shares Outstanding (Basic) | 602.58M606.55M | −0.7% |
| Shares Outstanding (Diluted) | 611.72M620.70M | −1.4% |
05—Questions
Frequently Asked Questions
How much of Cognizant's revenue is concentrated in a single industry or geography?
Financial Services accounted for 41.3% of 2012 revenue, Healthcare 26.3%, Manufacturing/Retail/Logistics 20.4%, and Other 12.0%. North America generated 79.4% of revenue and Europe 16.3%. This concentration is a key risk because a downturn in banking or insurance could significantly reduce demand.
Is Cognizant's margin at risk from Indian wage inflation and currency movements?
Partly. Wages in India have historically risen faster than in the U.S., and a stronger rupee raises delivery costs. In 2012, the weaker rupee actually helped margins by about 355 basis points before hedging, and management estimates each 1% change in the rupee-dollar rate moves operating margin by about 24 basis points. The company hedges with rupee forward contracts, which had a notional value of $3.35 billion at year end, though these hedges also produced losses of $96.1 million in 2012.
What regulatory risks could affect Cognizant's ability to staff projects?
Immigration rules are the main concern. The H-1B cap was reached for fiscal 2013, and the company must rely on L-1 and H-1B visas to staff U.S. client sites. Tighter L-1B interpretations or new anti-outsourcing legislation in the U.S. or EU could limit its offshore delivery model.
Does Cognizant pay a dividend or rely on debt financing?
No. The company has never paid cash dividends on its Class A common stock and intends to retain earnings to fund growth. It carries no third-party debt and returns capital to shareholders through share repurchases, with $133.6 million remaining under its authorization at year end.
06—Continue