10-QPeriod: Q2 FY2002

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2002

Filed August 8, 2002For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation reported strong revenue growth for the second quarter and the first six months of fiscal year 2002. Total revenues for the three months ended June 30, 2002, increased by 19.7% to $54.4 million, and for the six months ended June 30, 2002, revenue grew by 13.5% to $100.8 million compared to the prior year periods. This growth was driven by increased demand for both application management and application development services across its North American and European segments. The company also demonstrated improved profitability, with net income rising to $8.6 million for the quarter and $15.8 million for the six-month period, up from $5.8 million and $11.4 million, respectively, in the comparable periods of 2001. A significant factor contributing to the enhanced profitability was a reduction in the effective income tax rate, primarily due to a strategic decision to no longer accrue taxes on repatriated earnings from its Indian subsidiary, classifying them as permanently reinvested. The company ended the quarter with a healthy cash position of $103.8 million and no third-party debt, indicating a strong liquidity profile.

Key Highlights

  • 1Revenue growth of 19.7% to $54.4 million for Q2 2002 and 13.5% to $100.8 million for the first six months of 2002.
  • 2Net income increased to $8.6 million for Q2 2002 and $15.8 million for the first six months of 2002.
  • 3Gross profit margin decreased slightly to 46.0% in Q2 2002 from 48.5% in Q2 2001, attributed to a higher incentive compensation accrual.
  • 4Selling, general, and administrative expenses as a percentage of revenue decreased, showing operating leverage.
  • 5Significant reduction in effective income tax rate from 37.4% in Q2 2001 to 22.5% in Q2 2002 due to changes in repatriation tax policy for Indian earnings.
  • 6Cash and cash equivalents increased to $103.8 million as of June 30, 2002.
  • 7The company made a strategic investment in Ireland, acquiring assets from UnitedHealthcare Ireland Limited to support international expansion.

Frequently Asked Questions

Cognizant's revenue growth is primarily driven by increased demand for its application management and application development services, particularly in its North American and European segments.

The effective tax rate decreased significantly due to a strategic decision to no longer accrue taxes on earnings from its Indian subsidiary, as these earnings are now considered permanently reinvested outside the United States. Additionally, a change in how repatriated earnings are taxed in India contributed to this reduction.

The company's liquidity remains strong, with cash and cash equivalents increasing to $103.8 million as of June 30, 2002. The company also has no third-party debt, indicating a healthy financial position.

The acquisition of assets from UnitedHealthcare Ireland Limited, through its newly formed subsidiary CTS Ireland, is part of Cognizant's international expansion strategy. This investment is expected to enable the company to provide a wider range of services to clients in Europe and globally, although its initial operating results are not expected to be material to the company's overall financial performance.