10-QPeriod: Q2 FY2006

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2006

Filed August 9, 2006For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial performance for the quarter ended June 30, 2006, with revenues increasing by 59.1% year-over-year to $336.8 million. Net income also saw a significant jump of 52.8% to $55.1 million, or $0.37 per diluted share. This growth was driven by robust performance across key segments, particularly Financial Services and Healthcare, and continued expansion of their on-site/offshore delivery model. The company demonstrated solid operational execution, with revenue growth across existing and new clients. While operating margins saw a slight decrease to 18.0% compared to 20.0% in the prior year quarter, this was primarily due to the adoption of SFAS No. 123R impacting stock-based compensation expenses. Excluding these costs, the operating margin remained strong at 20.0%. Cognizant continues to invest in its business, including expanding its owned development centers in India, and maintains a healthy balance sheet with substantial cash reserves and no third-party debt.

Key Highlights

  • 1Revenue for the quarter increased 59.1% to $336.8 million compared to the prior year period.
  • 2Net income rose by 52.8% to $55.1 million ($0.37 per diluted share) compared to the prior year period.
  • 3Strong growth was observed across all business segments, with Financial Services and Healthcare showing particularly high increases.
  • 4The company added 5 strategic clients, bringing the total to 77, and maintained a client base of approximately 270 active clients.
  • 5Operating margin was 18.0%, or 20.0% excluding stock-based compensation, demonstrating continued profitability.
  • 6The company's balance sheet remains strong with $468.2 million in cash and short-term investments and no third-party debt.
  • 7Expansion plans for owned development centers in India continue, with approximately 1.7 million square feet planned.

Frequently Asked Questions

The primary drivers of revenue growth include the strong performance of key segments like Financial Services and Healthcare, the increasing acceptance of their on-site/offshore delivery model across various industries, expansion of service offerings, increased penetration at existing customers, and greater penetration with European customers.

The adoption of SFAS No. 123R, effective January 1, 2006, required the recognition of stock-based compensation expense. This resulted in an increase in operating expenses and a decrease in reported operating margin and net income margin compared to the prior year, which did not include such expenses. The pre-tax stock-based compensation costs for the quarter were $6.8 million.

Cognizant continues to invest in its business to drive growth, including hiring client partners, training technical staff, strengthening business analytics, expanding service portfolios, and growing its geographic presence. They are also expanding their owned development centers in India and see Europe as a significant growth opportunity.

The company maintains a strong financial position with $468.2 million in cash and cash equivalents and short-term investments as of June 30, 2006. They have no third-party debt and significant working capital of approximately $642.3 million, indicating no near-term liquidity concerns.