01—Abstract
Summary
Summary of the 10-K filed February 14, 2020. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) closed 2019 with revenue of $16.78 billiona, up 4.1% (5.2% in constant currency), but operating profit fell sharply.
Income from operations declined 12.4% to $2.45 billionb, and operating margin compressed from 17.4% to 14.6%. Diluted EPS dropped 8.6% to $3.29, and net income fell 12.3% to $1.84 billion. Management attributed the margin decline to delivery personnel costs outpacing revenue growth, dilution from recent acquisitions, contract renegotiations with merged healthcare clients, and a 'Customer Dispute.' Adjusted diluted EPS was $3.99, down 0.7%, which excludes restructuring, a $117 million India Defined Contribution Obligation accrual, and an equity-investment impairment. management is launching a multi-year '2020 Fit for Growth Plan' to accelerate growth and cut costs.
It targets $500c-550 million in annualized gross savings, against $100-150 million of expected 2020 charges. The plan also exits certain content-related work, which management estimates will reduce 2020 revenue by $180-200 million. Management is also reinvesting in sales, marketing, digital capabilities (IoT, AI, digital engineering, cloud), and acquisitions.
Capital return remained substantial: $2.6 billiond went to shareholders in 2019, and the board raised the buyback authorization to $7.5 billion and the quarterly dividend by 10%, to $0.22. Investors should weigh several overhangs. The company holds about $2.4 billion of cash in India, and $414 million of it is restricted in an ongoing tax dispute with India's Income Tax Department.
Revenue depends heavily on North America (about 76% of 2019 revenue). Pending matters include the retroactive India Defined Contribution Obligation, FCPA-related securities litigation, and changes to US immigration policy that affect the visa-dependent workforce.
02—Key points
Key Highlights
- Revenue rose 4.1% to $16.78B (5.2% constant currency), led by Products and Resources (+10.4%) and Communications, Media and Technology (+11.5%), while Financial Services and Healthcare grew only about 0.5%.
- Operating margin fell 280 bps to 14.6% and income from operations declined 12.4% to $2.45B, driven by delivery cost growth outpacing revenue, acquisition dilution, and healthcare client contract renegotiations.
- Diluted EPS fell 8.6% to $3.29; adjusted diluted EPS was $3.99, down 0.7%, after excluding $217M of restructuring charges and a $117M India Defined Contribution Obligation accrual.
- The 2020 Fit for Growth Plan targets $500-550M in annualized gross savings, with $100-150M of additional 2020 charges. It also includes exiting content-related work, expected to reduce 2020 revenue by $180-200M.
- Returned $2.6B to shareholders in 2019 ($2.16B buybacks, $453M dividends); the buyback authorization was raised to $7.5B and the quarterly dividend increased 10% to $0.22.
- Liquidity is solid, with $3.4B of cash and short-term investments (including $414M restricted), $1.9B of undrawn credit capacity, and $2.5B of operating cash flow.
- Key risks include a pending ITD tax dispute (about $463M claimed on the 2016 transaction), uncertain retroactive India retirement-contribution liabilities, FCPA-related securities class actions, and H-1B visa policy changes affecting a visa-dependent workforce.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 14, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $16.78B$16.13B | +4.1% |
| SG&A Expenses | $2.97B$3.01B | −1.2% |
| Operating Income | $2.45B$2.80B | −12.4% |
| Interest Expense | $26.00M$27.00M | −3.7% |
| Net Income | $1.84B$2.10B | −12.3% |
| EPS (Basic) | $3.30$3.61 | −8.6% |
| EPS (Diluted) | $3.29$3.60 | −8.6% |
| Shares Outstanding (Basic) | 559.00M582.00M | −4.0% |
| Shares Outstanding (Diluted) | 560.00M584.00M | −4.1% |
05—Questions
Frequently Asked Questions
Why did Cognizant's profitability decline in 2019 despite revenue growth?
Delivery personnel costs (employees and subcontractors) grew faster than revenue. Recent acquisitions were dilutive to margins, and contract renegotiations with merged healthcare clients and the Customer Dispute added pressure. Cost of revenues rose to 63.4% of revenue from 61.0%. Restructuring charges also rose to $217M from $19M.
What is the 2020 Fit for Growth Plan and what financial impact should investors expect?
It is a multi-year plan to reinvest in digital capabilities, sales and marketing, and acquisitions while cutting costs. It targets $500-550M in annualized gross savings, though 2020 realized savings will be lower than the run rate. Expected additional 2020 charges are $100-150M, mainly severance and facility exit costs. The exit from certain content-related work is expected to reduce 2020 revenue by $180-200M.
How strong is Cognizant's balance sheet and capital return capacity?
The company had $3.4B in cash and short-term investments at year-end 2019, of which $414M is restricted. It had about $1.9B of undrawn revolver capacity and $2.5B of operating cash flow. Total debt was $738M against $11.0B of equity. Shares outstanding fell to 548M from 577M, and the board increased buyback authorization to $7.5B.
What are the biggest legal and tax risks to the investment case?
The main items are the ITD dispute, which involves about $463M in claimed taxes on a 2016 share repurchase (plus a 2013 transaction), with $414M of cash restricted; the India Defined Contribution Obligation, where $117M was accrued but the ultimate amount could differ materially if applied retroactively; and securities and derivative class actions tied to the concluded FCPA investigation, for which no loss accrual has been recorded.
How concentrated is Cognizant's revenue by geography and client?
North America generated about 75.8% of 2019 revenue, and the Financial Services and Healthcare segments make up about 63% of revenue combined. The top five clients accounted for 7.9% of revenue and the top ten for 14.6%, so client concentration is moderate. Visa and immigration policy changes are a material risk because a large share of U.S. and European staff depends on work authorizations.
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