10-QPeriod: Q1 FY2002

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2002

Filed May 13, 2002For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported solid financial results for the first quarter ended March 31, 2002. Total revenues increased by 7.1% year-over-year to $46.5 million, driven by growth in application management services. Net income saw a significant rise of 27.7% to $7.1 million, or $0.35 per diluted share, up from $5.6 million ($0.28 per diluted share) in the prior year's first quarter. This improved profitability was partly due to a strategic shift in income tax policy for its Indian subsidiary, leading to a lower effective tax rate. The company continues to invest in its global infrastructure, particularly in India, with significant capital commitments for expansion. While gross profit margin saw a slight decrease due to lower utilization of technical professionals, the company's operating income also grew, demonstrating effective cost management and operational leverage. Cognizant's financial position remains strong, with ample cash and cash equivalents, indicating the company is well-positioned to fund its growth initiatives.

Key Highlights

  • 1Revenue increased by 7.1% to $46.5 million in Q1 2002 compared to Q1 2001.
  • 2Net income grew by 27.7% to $7.1 million in Q1 2002, with diluted EPS rising to $0.35.
  • 3Gross profit margin slightly decreased from 48.5% to 48.0% due to lower professional utilization.
  • 4Operating income increased by 9.0% to $9.2 million.
  • 5The company implemented a change in its income tax strategy for its Indian subsidiary, reducing the effective tax rate from 37.4% to 24.5% for the quarter.
  • 6Significant capital commitments are in place for the expansion of development centers in India.
  • 7Cash and cash equivalents stood at $91.2 million as of March 31, 2002, indicating strong liquidity.

Frequently Asked Questions

The primary driver of revenue growth was an increase in application management services.

Cognizant changed its tax strategy for its Indian subsidiary. Previously, it accrued taxes on undistributed earnings with the intent to repatriate them to the U.S. Now, due to an expanded international strategy, these earnings are considered permanently reinvested, and taxes are no longer accrued on 2002 and future Indian earnings. This change significantly lowered the effective tax rate.

The company plans to fund its expansion, including the development centers in India, through internally generated funds and cash flows from operations. They have approximately $91.2 million in cash and cash equivalents as of March 31, 2002.

In the first quarter of 2002, sales to IMS Health (a related party and majority shareholder) accounted for 10.4% of revenues. No single third-party customer accounted for more than 10% of revenues in the first quarter of 2002.