10-QPeriod: Q3 FY2005

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q3 Ended Sep 30, 2005

Filed November 8, 2005For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported a strong performance for the third quarter and the first nine months of fiscal year 2005, demonstrating significant year-over-year growth in both revenue and net income. Revenue surged by over 50% in both periods, driven by increased demand for their on-site/offshore IT services model, expansion within existing client relationships, and the addition of new clients, including the recent acquisition of Fathom Solutions. The company maintained healthy operating margins, around 20%, and saw improvements in net income as a percentage of revenue, partly due to a slightly lower effective tax rate and leverage from revenue growth. Cognizant ended the period with a robust balance sheet, substantial cash and short-term investments, and no third-party debt, indicating strong liquidity and financial flexibility. The company continues to invest in infrastructure, particularly in India, and remains open to strategic acquisitions to enhance its capabilities.

Key Highlights

  • 1Revenue increased by 51.5% to $235.5 million for the three months ended September 30, 2005, compared to $155.4 million in the prior year period.
  • 2Net income grew by 55.8% to $40.6 million ($0.28 per diluted share) for the three months ended September 30, 2005, compared to $26.1 million ($0.18 per diluted share) in the prior year period.
  • 3Gross profit margin remained stable at 45.6% for the three-month period, indicating consistent operational efficiency.
  • 4Selling, general, and administrative expenses as a percentage of revenue slightly decreased, demonstrating economies of scale.
  • 5The company ended the quarter with $368.5 million in cash and short-term investments and no third-party debt, highlighting strong liquidity.
  • 6Investments in property and equipment increased significantly, supporting expansion plans for offshore development centers, particularly in India.
  • 7The Financial Services segment continues to be the largest revenue contributor, showing substantial year-over-year growth.

Frequently Asked Questions

Revenue growth was primarily driven by the increasing acceptance and adoption of Cognizant's on-site/offshore IT services delivery model, expanded business with existing clients, and the acquisition of new customers, including the recent acquisition of Fathom Solutions. Demand across all business segments for a broad range of services also contributed significantly.

Cognizant has maintained its gross profit margin at 45.6% for the quarter. While cost of revenues increased proportionally with revenue growth due to higher compensation for technical staff, selling, general, and administrative expenses grew at a slightly slower pace as a percentage of revenue, contributing to operating margin stability and a slight increase in net income as a percentage of revenue.

Cognizant reported strong liquidity with $368.5 million in cash and short-term investments and no outstanding third-party debt as of September 30, 2005. Working capital also saw a significant increase, indicating a healthy financial position to fund operations, investments, and potential future acquisitions.

The company anticipates continued revenue growth from existing clients and expects to expand its presence in Europe. Significant investments are being made in infrastructure, particularly in India, for new development and training centers. Cognizant also continues to evaluate strategic acquisitions to enhance its service offerings and market reach.