10-QPeriod: Q1 FY2005

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2005

Filed May 10, 2005For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation reported robust financial performance for the quarter ended March 31, 2005, demonstrating significant year-over-year growth. Revenue surged by 51.7% to $181.7 million, driven by strong demand across all business segments and the increasing acceptance of its on-site/offshore delivery model. This top-line growth translated into a substantial increase in net income, which grew by 61.6% to $32.0 million, with diluted earnings per share rising to $0.22 from $0.14 in the prior year period. The company maintained healthy operating margins, which improved slightly to 20.5% from 19.8%, reflecting effective cost management and economies of scale. Cognizant also benefited from a lower effective income tax rate, largely due to the growing portion of its Indian subsidiary's revenue falling under tax holidays. The company ended the quarter with a strong liquidity position, holding $314.4 million in cash and short-term investments, with no third-party debt, enabling continued investment in operational expansion and potential acquisitions.

Key Highlights

  • 1Revenue increased by a significant 51.7% year-over-year to $181.7 million for the first quarter of 2005.
  • 2Net income saw a substantial increase of 61.6% to $32.0 million, with diluted EPS rising to $0.22 from $0.15.
  • 3Operating margin improved to 20.5% from 19.8% in the comparable prior year period.
  • 4The company experienced strong growth across all its reportable segments, particularly in Manufacturing/Retail/Logistics which grew 81.4%.
  • 5Cognizant maintained a strong balance sheet with $314.4 million in cash and short-term investments and no third-party debt.
  • 6The effective income tax rate decreased to 17.8% from 20.3% due to increased tax holiday benefits in India.
  • 7The company is investing in expanding its development centers in India, with approximately $42.4 million in capital commitments.

Frequently Asked Questions

The primary driver of Cognizant's revenue growth was the greater acceptance of its on-site/offshore IT delivery model, coupled with increased revenue from existing clients and new customer additions. Strong demand across all business segments for a broad range of services also contributed significantly.

Operating margins improved slightly to 20.5% from 19.8% in the prior year's first quarter. This improvement was attributed to the leverage gained from increased revenues, expanded sales and marketing activities, timing of compensation increases, strong pricing power, and the company's ability to leverage growing economies of scale.

Cognizant ended the quarter with $314.4 million in cash and short-term investments and no third-party debt, indicating a strong liquidity position. The company anticipates that its available funds and projected cash flows from operations will be adequate to meet its short-term needs and support its planned growth, including investments in operational expansion and potential acquisitions.

The American Jobs Creation Act of 2004 provides a temporary incentive for US corporations to repatriate accumulated foreign earnings. Cognizant is evaluating the provisions of this act and expects to make a decision on repatriation in 2005. The potential repatriation amount could be between $0 and $500 million, but the exact tax liability is uncertain due to the complexities and lack of clarity surrounding the Act.