10-QPeriod: Q3 FY2004

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q3 Ended Sep 30, 2004

Filed November 8, 2004For Securities:CTSH

Summary

Cognizant Technology Solutions Corp. (CTSH) reported robust financial performance for the third quarter and the first nine months of 2004, demonstrating significant year-over-year growth. Revenue surged by 58.4% to $155.4 million in Q3 2004 and by 59.1% to $413.9 million for the nine-month period, driven by strong demand for application management, development, and integration services. Net income also saw substantial increases, reaching $26.1 million ($0.18/share) for the quarter and $69.6 million ($0.49/share) for the nine months. The company's integrated on-site/offshore business model, particularly its capabilities in India, continues to be a key growth driver. Cognizant also announced plans to expand its development centers in India, underscoring its commitment to its offshore strategy.

Key Highlights

  • 1Significant revenue growth: 58.4% increase in Q3 2004 and 59.1% increase for the nine months ended September 30, 2004, reaching $155.4 million and $413.9 million, respectively.
  • 2Robust net income growth: Net income increased by 63.2% in Q3 2004 to $26.1 million and by 75.7% for the nine months to $69.6 million.
  • 3Strong demand for core services: Growth driven by application management, development, and integration services.
  • 4Expansion of offshore capabilities: Plans to construct approximately 900,000 square feet of new development centers in India.
  • 5Healthy operating margins maintained: Operating margin was 19.9% for Q3 2004, within the targeted range of 19-20%.
  • 6Increased client base: Number of active clients grew to 219 as of September 30, 2004.
  • 7Strong liquidity position: Cash and cash equivalents and short-term bank deposits stood at $270.4 million as of September 30, 2004, with no third-party debt.

Frequently Asked Questions

Cognizant's revenue growth is primarily driven by the continued strong demand for its application management, application development, and integration services. This growth is also fueled by increased business from existing clients and new client acquisitions, benefiting from its effective on-site/offshore business model.

The company is significantly investing in expanding its operational capacity, with plans to construct an additional 900,000 square feet of development centers in India. This expansion is funded from current operations and is aimed at supporting its growth strategy and service capabilities.

Cognizant maintains a strong financial position with $270.4 million in cash and cash equivalents and short-term bank deposits as of September 30, 2004, and no third-party debt. This strong liquidity, combined with positive operating cash flows, indicates the company does not anticipate near-term liquidity issues.

Key risks include the concentration of employees in India, which exposes the company to international operational risks such as currency fluctuations and regulatory changes. The company also notes potential liabilities related to customer claims for damages and a specific indemnification obligation to IMS Health related to tax liabilities arising from their past split-off, which could be material if triggered.