01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) reported FY2017 revenue of $14.81 billiona, up 9.8% year over year, with GAAP income from operations of $2.48 billion (16.8% margin, down from 17.0%) and non-GAAP operating margin of 19.7%, up from 19.5%.
Growth was broad-based: Communications, Media and Technology grew 17.7%, Products and Resources 14.3%, Healthcare 10.1%, and Financial Services 5.0%. Management is targeting a 22% non-GAAP operating margin in 2019 through a realignment program that cost $72 millionb in 2017, with more realignment costs possible in 2018. GAAP diluted EPS fell slightly to $2.53 from $2.55, and net income declined 3.2% to $1.50 billion.
The drop was driven by a one-time provisional $617 millionc net tax charge from the U.S. Tax Cuts and Jobs Act, which lifted the effective tax rate to 43.4%. Excluding that charge and other adjustments, non-GAAP diluted EPS rose 11.2% to $3.77. Management expects a 24%-26% effective tax rate for 2018-2020, and the Tax Act's transition tax is payable over eight years.
Capital returns are a major theme. The company is executing a $3.4 billiond return plan through 2018, which included $1.8 billion of accelerated share repurchases and $265 million of dividends in 2017.
The quarterly dividend was raised to $0.20 in February 2018, and roughly $1.7 billion remains under the buyback authorization. Offsetting these positives, the 10-K discloses an ongoing FCPA internal investigation (about $6 million in questionable payments in India), related DOJ and SEC inquiries, and consolidated securities class action and derivative suits with no accrual recorded, plus a material weakness identified in 2016 that was remediated as of year-end 2017.
02—Key points
Key Highlights
- Revenue grew 9.8% to $14.81 billion; North America was 77.3% of revenue and grew 8.6%, while Europe grew 11.8% and Rest of World grew 20.9%.
- GAAP operating margin slipped to 16.8% from 17.0%, while non-GAAP operating margin rose to 19.7% from 19.5%; management targets 22% non-GAAP margin by 2019.
- GAAP diluted EPS was $2.53 (vs. $2.55) due to a $617 million one-time Tax Act charge; non-GAAP diluted EPS grew 11.2% to $3.77.
- Segment growth was led by Communications, Media & Technology (+17.7%), Products & Resources (+14.3%), and Healthcare (+10.1%); Financial Services grew 5.0% and remains the largest segment at 38.1% of revenue.
- Capital returns: $1.8 billion in accelerated buybacks and $265 million in dividends in 2017 under a $3.4 billion plan; quarterly dividend raised to $0.20 and $1.7 billion remains authorized.
- Concentration and legal risks persist: top ten customers were 14.9% of revenue, and the FCPA investigation, DOJ/SEC inquiries, and class action and derivative suits remain unresolved with no accrual recorded.
- Balance sheet is strong: $5.06 billion in cash and short-term investments against $873 million of total debt, with $4.86 billion of cash held outside the U.S. (including $1.4 billion in India).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $14.81B$13.49B | +9.8% |
| SG&A Expenses | $2.70B$2.73B | −1.2% |
| Operating Income | $2.48B$2.29B | +8.4% |
| Interest Expense | $23.00M$19.00M | +21.1% |
| Net Income | $1.50B$1.55B | −3.2% |
| EPS (Basic) | $2.54$2.56 | −0.8% |
| EPS (Diluted) | $2.53$2.55 | −0.8% |
| Shares Outstanding (Basic) | 593.00M607.00M | −2.3% |
| Shares Outstanding (Diluted) | 595.00M610.00M | −2.5% |
05—Questions
Frequently Asked Questions
Why did GAAP earnings decline in 2017 even though revenue grew nearly 10%?
Net income fell 3.2% to $1.50 billion mainly because of a one-time provisional $617 million net income tax expense from the U.S. Tax Cuts and Jobs Act, which raised the effective tax rate to 43.4% from 34.2%. Operating income rose 8.4%, and the company's non-GAAP diluted EPS grew 11.2% to $3.77 after excluding the tax charge and other items. The charge is provisional and could change as guidance is issued.
What is the company's margin outlook?
Management aims to gradually expand non-GAAP operating margin to 22% by 2019, from 19.7% in 2017. Targets depend on efficiency gains, higher-margin work, and cost reduction, and the company states there are no assurances it will achieve them. Realignment costs ($72 million in 2017) are excluded from non-GAAP results, and additional realignment costs are expected in 2018.
How much is Cognizant returning to shareholders, and how is it being done?
The company announced a $3.4 billion return plan in February 2017 to be completed by the end of 2018. Through 2017 it executed $1.8 billion of accelerated share repurchases (including a $300 million December ASR whose final share count is set in Q1 2018) and paid $265 million in dividends. The quarterly dividend started at $0.15 and was increased to $0.20 in February 2018, and management is reviewing the plan in light of the tax law changes.
What are the main legal and regulatory risks investors should watch?
The company is conducting an internal investigation into possible FCPA violations involving payments tied to Company-owned facilities in India; about $6 million in potentially improper payments from 2009 to 2016 has been identified and voluntarily reported to the DOJ and SEC. Securities class action and shareholder derivative suits are pending, and management cannot estimate potential losses, so no accrual has been recorded. Legal and investigation costs were $36 million in 2017 and are expected to continue in 2018. A 2016 material weakness was remediated as of December 31, 2017.
How concentrated is the business by customer, industry, and geography?
Concentration is meaningful but declining. The top five customers were 8.9% of 2017 revenue and the top ten were 14.9%, both down from prior years, and no single customer exceeded 10%. Financial Services (38.1%) and Healthcare (28.8%) make up most of the customer base, and North America (77.3%) and Europe (16.2%) dominate geographically. Most delivery staff, about 180,000 of roughly 260,000 employees, are in India, which exposes the company to rupee currency and wage-inflation risk.
06—Continue