01—Abstract
Summary
Summary of the 10-K filed February 15, 2023. Cited figures are marked; the original filing is the authoritative source.
Cognizant (CTSH) closed fiscal 2022 with revenue of $19.43 billiona, up 5.0% year over year (7.5% in constant currency), with acquisitions adding about 100 basis points and the Samlink divestiture subtracting about 60 basis points.
GAAP operating income rose 5.0% to $2.97 billionb, and operating margin held flat at 15.3%. Diluted EPS was $4.41, up 8.9%, while adjusted diluted EPS was $4.40, up 6.8%. Net income reached $2.29 billion.
The main headwinds were elevated employee attrition (31.7%c for the full year, though the Q4 annualized rate fell to 25.3% from 34.6%) and higher delivery compensation costs. Partial offsets included pricing gains, delivery efficiencies, and a weaker Indian rupee. A 30 basis point impairment on a Health Sciences contract also weighed on margins.
Cash generation was solid, with operating cash flow of $2.57 billiond and free cash flow of $2.24 billion. Cognizant returned capital through $1.42 billion of buybacks and $564 million of dividends. The board raised the quarterly dividend to $0.29 per share from $0.27, and about $2.8 billion remains under the $11.5 billion repurchase authorization.
The balance sheet is conservative: cash and short-term investments total $2.5 billion, debt is roughly $650 million, and the company refinanced its credit facilities in October 2022 with a maturity extended to 2027. Subsequent events include the OneSource Virtual acquisition ($103 million) and a pending Mobica acquisition (about $335 million), which signal continued inorganic growth.
Key risks for investors include ongoing talent-market pressure on margins, client concentration in the United States and Europe, a pending Indian tax dispute with the ITD over 2013 and 2016 share repurchases (roughly $400 million of tax claimed on the 2016 transaction, with no reserve recorded), and a potential retroactive liability tied to India's Defined Contribution ruling, which is partly accrued. Management expects Q1 2023 attrition to come in below the full-year 2022 rate.
02—Key points
Key Highlights
- Revenue grew 5.0% to $19.43B (7.5% constant currency), driven by digital demand and pricing, partly offset by the Samlink divestiture.
- Operating margin held flat at 15.3% GAAP; adjusted operating margin was 15.3%, down 10 bps, as delivery compensation costs rose.
- Diluted EPS rose 8.9% to $4.41 (GAAP); adjusted diluted EPS rose 6.8% to $4.40.
- Free cash flow was $2.24B, up 1% from $2.22B, with operating cash flow of $2.57B.
- Capital returns totaled roughly $2.0B in 2022 ($1.42B buybacks plus $564M dividends); the quarterly dividend was raised to $0.29.
- Annualized attrition improved to 25.3% in Q4 2022 from 34.6% a year earlier, though full-year attrition was 31.7%.
- Balance sheet remains strong, with $2.5B in cash and short-term investments and debt refinanced through October 2027; $2.0B of revolver capacity is available.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 15, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $19.43B$18.51B | +5.0% |
| SG&A Expenses | $3.44B$3.50B | −1.7% |
| Operating Income | $2.97B$2.83B | +5.0% |
| Interest Expense | $19.00M$9.00M | +111.1% |
| Net Income | $2.29B$2.14B | +7.2% |
| EPS (Basic) | $4.42$4.06 | +8.9% |
| EPS (Diluted) | $4.41$4.05 | +8.9% |
| Shares Outstanding (Basic) | 518.00M527.00M | −1.7% |
| Shares Outstanding (Diluted) | 519.00M528.00M | −1.7% |
05—Questions
Frequently Asked Questions
How did Cognizant's growth and profitability trend in 2022?
Revenue grew 5.0% to $19.43 billion, or 7.5% in constant currency. Operating income grew 5.0% to $2.97 billion, and operating margin was flat at 15.3%. Net income rose 7.2% to $2.29 billion. Growth was helped by digital demand and pricing, while attrition-driven compensation costs and a Health Sciences contract impairment weighed on margins.
Is the company's dividend and buyback program sustainable?
Operating cash flow of $2.57 billion and free cash flow of $2.24 billion covered 2022 dividends of $564 million and buybacks of $1.42 billion. Management's capital allocation framework targets roughly 50% of free cash flow for acquisitions, 25% for buybacks, and 25% for dividends. About $2.8 billion remains under the buyback authorization, and the company has a modest debt load of about $650 million.
What are the biggest risks flagged in the filing?
The main risks are talent retention and wage inflation, which pressure margins; client concentration in North America and Europe; and an unresolved Indian tax dispute with the Indian Income Tax Department over 2013 and 2016 share repurchases, with about $400 million of claimed tax on the 2016 transaction and no reserve recorded. Other risks include a potential retroactive liability tied to India's defined contribution ruling, cybersecurity exposure following the 2020 ransomware incident, visa and immigration restrictions, and anti-outsourcing legislation.
What does the 2023 outlook look like for acquisitions and attrition?
Cognizant continues to pursue acquisitions to accelerate digital growth. In January 2023 it completed the OneSource Virtual purchase for $103 million and agreed to acquire Mobica for about $335 million, expected to close in Q1 2023. Management expects Q1 2023 annualized attrition to be lower than the full-year 2022 rate of 31.7%. Cash taxes will also rise, with Tax Reform Act transition payments of $94 million in 2023 and about $300 million tied to research and experimental expense capitalization.
How significant is the Samlink divestiture to the reported results?
The Samlink sale closed on February 1, 2022, and reduced 2022 revenue growth by about 60 basis points, or roughly $104 million, mainly in the Financial Services segment and Continental Europe. Excluding this effect, underlying growth was somewhat stronger than the reported 5.0%.
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