10-QPeriod: Q2 FY2003

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2003

Filed August 13, 2003For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong top-line growth in its second quarter and first half of 2003, with revenues increasing by 60.9% and 60.6% respectively, compared to the prior year periods. This growth was driven by increased demand for its IT consulting services, particularly in application management and development, and aided by the recent acquisition of Aces International Inc. Profitability saw a notable increase in absolute terms, with net income rising by approximately 56% for the quarter and 50% for the first half. However, net income as a percentage of revenue slightly declined due to increased selling, general and administrative expenses and higher effective tax rates, particularly from changes in Indian tax laws. The company also completed a significant corporate event: the split-off from IMS Health, which occurred on February 13, 2003. This event marked IMS Health's divestiture of its ownership in Cognizant, leading to the end of related-party transactions. Cognizant also underwent a 3-for-1 stock split effective April 1, 2003. The company maintained a strong balance sheet with healthy cash reserves and no third-party debt, indicating a solid liquidity position.

Key Highlights

  • 1Revenue growth of 60.9% year-over-year for the three months ended June 30, 2003, reaching $87.4 million.
  • 2Net income increased by 56% to $13.5 million for the three months ended June 30, 2003, compared to $8.6 million in the prior year.
  • 3Completed the split-off from IMS Health on February 13, 2003, ceasing related-party transactions.
  • 4Implemented a 3-for-1 stock split, effective April 1, 2003.
  • 5Acquired Aces International, Inc. on April 1, 2003, for approximately $4.7 million to expand CRM solutions.
  • 6Company maintains a strong liquidity position with $137.7 million in cash and cash equivalents and no third-party debt as of June 30, 2003.
  • 7Gross profit margin remained stable at 46.0% for the quarter, though it decreased slightly to 45.6% for the six-month period due to higher on-site employee costs and currency fluctuations.

Frequently Asked Questions

The split-off from IMS Health, completed on February 13, 2003, resulted in IMS Health no longer being a related party. This means that revenues generated from IMS Health after February 13, 2003, are classified as third-party revenues. While total revenues from IMS Health remained similar year-over-year for the six-month period, the nature of the transactions changed. The split-off also incurred costs for Cognizant, noted as 'Split-off costs' in the income statement, impacting net income for the period.

The acquisition of Aces International, Inc. on April 1, 2003, contributed to revenue growth in the second quarter and the first half of 2003. Aces specializes in Customer Relationship Management (CRM) solutions, enhancing Cognizant's service offerings. The acquisition was accounted for as a business combination, with approximately $4.58 million allocated to goodwill.

Cognizant is experiencing robust revenue growth driven by strong demand for its IT consulting services. While profitability in absolute terms is increasing, net income as a percentage of revenue saw a slight decrease in the quarter due to investments in SG&A and a marginally higher effective tax rate. The company's management expects its available funds and operating cash flows to be sufficient for at least the next 12 months, indicating a positive outlook, though subject to market conditions and competitive pressures.

A significant event was the 3-for-1 stock split effected by a 200% stock dividend, which was paid on April 1, 2003. All share counts and per-share data in the financial statements have been restated to reflect this split. Additionally, all Class B common stock automatically converted into Class A common stock on February 21, 2003, following the split-off, simplifying the capital structure.