10-QPeriod: Q3 FY2006

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 8, 2006For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial performance for the quarter ended September 30, 2006, demonstrating significant year-over-year growth in both revenue and net income. Revenue increased by 60.3% to $377.5 million, while net income rose by 50.4% to $61.0 million, translating to diluted EPS of $0.40. This growth was driven by strong demand across all business segments, particularly Healthcare and Other, and expansion of service offerings. The company's financial position remains robust, with a substantial increase in working capital and cash reserves. A key development highlighted is the adoption of SFAS No. 123R, which now requires the recognition of stock-based compensation expense. While this impacts reported operating margins, the company emphasizes that, on a non-GAAP basis excluding this expense, margins remain within their target range, reflecting continued strategic investments in growth areas. Overall, the report indicates a healthy and growing business with expanding client relationships and a strong market position. The company is actively investing in its infrastructure, particularly in India, to support future growth, and appears well-positioned to capitalize on the continued demand for IT services.

Key Highlights

  • 1Revenue for the third quarter of 2006 surged by 60.3% to $377.5 million compared to the same period in 2005.
  • 2Net income increased by 50.4% year-over-year, reaching $61.0 million, with diluted EPS at $0.40.
  • 3Strong growth was observed across all business segments, with Healthcare and Other segments showing particularly high growth rates (86.0% and 64.7% respectively).
  • 4The company adopted SFAS No. 123R, leading to the recognition of stock-based compensation expense, impacting reported operating margins, but non-GAAP operating margins remained strong.
  • 5Total clients grew to approximately 330, with an increase in strategic clients to 82.
  • 6Cash and cash equivalents plus short-term investments stood at $535.6 million as of September 30, 2006, indicating strong liquidity.
  • 7The company announced plans for significant investment in expanding its India real estate development program, with approximately $200 million planned expenditure through the end of 2008.

Frequently Asked Questions

Revenue growth was driven by strong demand across all business segments, particularly Healthcare and Other, an expansion of service offerings enabling cross-selling, increased penetration at existing customers, and greater penetration with European customers.

The adoption of SFAS No. 123R starting January 1, 2006, requires the recognition of stock-based compensation expense in the consolidated financial statements. This led to a decrease in reported operating margins for Q3 2006 compared to Q3 2005. However, on a non-GAAP basis, excluding stock-based compensation, the operating margin remained within the company's historical target range of 19-20%.

The company reported $535.6 million in cash and cash equivalents and short-term investments as of September 30, 2006, and approximately $707.9 million in working capital. They anticipate that available funds and expected operating cash flows will be adequate to satisfy current and planned operations for at least the next 12 months, with no near-term liquidity issues expected.

For the three months ended September 30, 2006, no single customer accounted for more than 10% of total revenues. This indicates a diversification of revenue streams compared to the prior year's quarter where two customers exceeded this threshold. The company also notes that as they add new customers and increase penetration at existing ones, the percentage of revenue from top customers is expected to trend down.