10-QPeriod: Q3 FY2003

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 12, 2003For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported robust financial performance for the third quarter and first nine months of fiscal year 2003. Total revenues demonstrated significant year-over-year growth, increasing by 60.2% for the quarter and 60.5% for the nine-month period, signaling strong market demand for its IT consulting services. This growth was driven by both application development and maintenance services, bolstered by the recent acquisition of Aces International, Inc. The company also successfully navigated a significant corporate event, the split-off from IMS Health, which was completed in February 2003, removing related party revenue and simplifying the corporate structure. Profitability remained strong, with net income increasing by 65.6% for the quarter and 55.9% for the nine months, reflecting effective operational management and a favorable reduction in the effective income tax rate. The company maintained healthy operating margins, demonstrating its ability to manage costs despite expansion efforts and currency fluctuations. Cognizant's balance sheet is robust, with substantial cash and cash equivalents and no third-party debt, indicating a strong liquidity position to fund ongoing operations and future strategic initiatives, including potential acquisitions and expansion of its offshore development centers.

Key Highlights

  • 1Total revenues grew significantly by 60.2% to $98.1 million for the three months ended September 30, 2003, compared to the prior year period.
  • 2Net income increased by 65.6% to $16.0 million for the three months ended September 30, 2003, demonstrating strong profitability.
  • 3The company completed the split-off from IMS Health in February 2003, marking a significant de-consolidation and simplification of its ownership structure.
  • 4Gross profit margin remained strong at 46.0% for the quarter, indicating efficient cost management of revenue-generating activities.
  • 5Selling, general, and administrative expenses, as a percentage of revenue, remained stable, showcasing operational leverage as the company scaled.
  • 6The effective income tax rate decreased from 23.3% to 19.7% for the three months ended September 30, 2003, positively impacting net income.
  • 7Cognizant reported a strong liquidity position with $159.7 million in cash and cash equivalents and no third-party debt as of September 30, 2003.

Frequently Asked Questions

The split-off from IMS Health, completed in February 2003, removed IMS Health as a related party. This means that revenues from IMS Health after the split-off date are treated as third-party revenues. Consequently, related-party revenues, which were significant in the prior year period, are no longer a material factor in the current reporting periods. The financial statements have been restated to reflect this change and the conversion of Class B common stock to Class A common stock.

The substantial revenue growth, over 60% for both the quarter and the nine-month period, was driven by increased demand for both application development and application maintenance services. This growth was also aided by the acquisition of Aces International, Inc., which expanded Cognizant's service offerings, particularly in Customer Relationship Management solutions.

The effective income tax rate decreased from 23.3% to 19.7% for the three-month period and from 23.4% to 21.0% for the nine-month period ended September 30, 2003. This reduction is primarily attributed to a lower overall effective income tax rate on foreign earnings, influenced by changes in Indian tax laws that increased the export earnings tax exemption and reduced surtaxes, as well as the company's strategic decision to consider Indian earnings as permanently reinvested outside the U.S.

Cognizant maintains a strong liquidity position, with cash and cash equivalents totaling $159.7 million as of September 30, 2003. The company has no third-party debt and ample working capital. Management believes its available funds and expected cash flows from operations are sufficient to meet its needs for at least the next 12 months, supporting its growth plans, potential acquisitions, and general corporate purposes.