10-QPeriod: Q1 FY2006

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2006

Filed May 9, 2006For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial results for the first quarter ended March 31, 2006, with a significant increase in revenue and net income compared to the prior year. Revenue grew by 57.1% year-over-year, driven by broad-based growth across all business segments, particularly Financial Services and Healthcare. This robust revenue expansion was supported by increased client acquisition and deeper penetration with existing customers. The company also demonstrated solid profitability, with income from operations increasing by 42.9%. Notably, the adoption of SFAS No. 123R for stock-based compensation introduced a new expense line, impacting reported operating margins. However, when excluding stock-based compensation, the underlying operational profitability remained strong and above historical target ranges, reflecting the company's strategic investments in talent and service offerings to fuel continued growth.

Key Highlights

  • 1Revenue surged by 57.1% to $285.5 million, up from $181.7 million in the prior year's quarter.
  • 2Net income rose by 47.5% to $47.2 million, or $0.32 per diluted share.
  • 3Income from operations increased by 42.9% to $53.2 million.
  • 4The Financial Services segment showed significant growth, with revenue up 51.4% to $135.8 million.
  • 5The Healthcare segment also experienced strong performance, with revenue increasing by 77.2% to $62.5 million.
  • 6The company adopted SFAS No. 123R, recognizing stock-based compensation expense of $7.6 million.
  • 7Cash and cash equivalents, along with short-term investments, totaled $422.5 million, with no third-party debt, indicating a strong liquidity position.

Frequently Asked Questions

The primary driver of revenue growth was the strong performance across all business segments, particularly Financial Services and Healthcare, along with increased demand for the company's expanding service offerings and deeper penetration with existing clients.

The adoption of SFAS No. 123R on January 1, 2006, led to the recognition of stock-based compensation expense. For the first quarter of 2006, this amounted to $7.6 million pre-tax, which affected reported operating margins. Additionally, tax benefits related to stock option exercises were reclassified from operating to financing activities.

Cognizant reported a strong liquidity position with $422.5 million in cash and short-term investments and no third-party debt. The company anticipates that available funds and operating cash flows will be sufficient for at least the next 12 months. Management is focused on continued investment in operations, new service lines, and potential acquisitions.