01—Abstract
Summary
Summary of the 10-K filed February 25, 2016. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) closed fiscal 2015 with revenue of $12.42 billiona, up 21.0% year over year, and net income of $1.62 billion, up 12.8%.
Diluted EPS was $2.65b on a GAAP basis and $3.07 on a non-GAAP basis. Growth was driven in large part by the November 2014 TriZetto acquisition, which contributed about $724.5 million in 2015 versus $80.6 million in 2014 and accounted for roughly 30% of year-over-year revenue growth. Organic growth remained solid, with consulting and technology services up 31.8% and outsourcing up 8.9%, and the shift toward project-based digital and transformational work continued.
Profitability was mixed. GAAP operating margin fell to 17.3%c from 18.4%, and non-GAAP operating margin fell to 19.7% from 20.2%. Management attributed the decline to higher compensation and benefit costs, including incentive pay, and to amortization from recent acquisitions.
A weaker Indian rupee offset part of the pressure, adding about 98 basis points to operating margin. Headcount rose to about 221,700, and annualized turnover was 19.1%d. Client concentration remains moderate: the top ten customers were 18.6% of revenue, and 98.4% of revenue came from clients who were already customers at the end of 2014.
The balance sheet is strong, with $4.95 billion in cash and short-term investments against $1.29 billion of debt, leaving the company in a net cash position. Operating cash flow was $2.15 billion.
Share repurchases totaled $460 million in 2015, with $437.9 million left under the $2.0 billion authorization, and the company pays no dividend. Key risks include reliance on India for most delivery staff and currency exposure, the possibility of anti-outsourcing and immigration legislation, Indian SEZ tax-holiday phase-outs, and the fact that most client contracts are short-term and terminable on short notice.
02—Key points
Key Highlights
- Revenue rose 21.0% to $12,416.0M in 2015, with TriZetto contributing about $724.5M of that total versus $80.6M in 2014.
- GAAP operating margin declined to 17.3% from 18.4%, and non-GAAP operating margin declined to 19.7% from 20.2%, driven by compensation costs and acquisition-related amortization.
- Net income grew 12.8% to $1,623.6M, and diluted EPS rose to $2.65 GAAP (up 12.8%) and $3.07 non-GAAP (up 18.1%).
- Consulting and technology services grew 31.8% and now represent 57.6% of revenue, while outsourcing grew 8.9% and represents 42.4%.
- Healthcare segment revenue rose 36.4% to $3,667.5M, driven mainly by TriZetto. Financial Services remains the largest segment at 40.3% of revenue.
- Net cash position: $4,949.5M in cash and short-term investments against $1,287.5M of debt. Operating cash flow was $2,153.3M, and $460M was returned through buybacks.
- Concentration and risk: North America is 78.6% of revenue, the top ten customers are 18.6%, and fixed-price contracts are 36.5% of revenue. Most of the workforce is in India, and the company faces possible anti-outsourcing legislation and changes to Indian SEZ tax benefits.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 25, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $12.42B$10.26B | +21.0% |
| SG&A Expenses | $2.51B$2.04B | +23.2% |
| Operating Income | $2.14B$1.89B | +13.6% |
| Interest Expense | $18.00M$3.00M | +500.0% |
| Net Income | $1.62B$1.44B | +12.9% |
| EPS (Basic) | $2.67$2.37 | +12.7% |
| EPS (Diluted) | $2.65$2.35 | +12.8% |
| Shares Outstanding (Basic) | 609.00M608.00M | +0.2% |
| Shares Outstanding (Diluted) | 613.00M613.00M | 0.0% |
05—Questions
Frequently Asked Questions
How much of Cognizant's 2015 revenue growth came from the TriZetto acquisition?
TriZetto contributed about $724.5M of 2015 revenue versus $80.6M in 2014, an increase of about $643.9M. That represents roughly 29.9% of the $2,153.3M year-over-year revenue increase, so the majority of the growth came from organic expansion.
Why did Cognizant's operating margin decline in 2015?
The GAAP operating margin fell to 17.3% from 18.4%, and the non-GAAP margin fell to 19.7% from 20.2%. Management cited higher compensation and benefit costs, including incentive-based pay, and higher depreciation and amortization from recent acquisitions. A weaker rupee partly offset these pressures, adding roughly 98 basis points to margin.
How strong is Cognizant's balance sheet and capital position?
As of December 31, 2015, the company held $4.95B in cash and short-term investments against $1.29B of debt, which is a net cash position. Debt consists of a $1.0B term loan and a $750M revolver, and the credit agreement requires a debt-to-equity ratio of no more than 0.40 to 1.00. The company does not pay dividends and has $437.9M remaining under its $2.0B buyback authorization.
What are the main risks to Cognizant's business highlighted in the filing?
Key risks include intense competition that pressures pricing, dependence on a workforce concentrated in India with rising wage costs and rupee exposure, and the possibility of anti-outsourcing or immigration restrictions in the U.S. and Europe. Most client contracts are short-term and can be terminated on short notice. The filing also flags concentration in financial services and healthcare, possible loss of India SEZ tax holidays, and the risks of fixed-price contracts.
How concentrated is Cognizant's customer base?
Concentration is moderate. The top five customers represented 11.0% of 2015 revenue and the top ten represented 18.6%, both down from 2013. No single customer exceeded 10% of revenue. Approximately 98.4% of 2015 revenue came from clients who were already customers at the end of 2014, which points to strong retention.
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