10-QPeriod: Q1 FY2007

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2007

Filed May 10, 2007For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong revenue growth of 61.2% to $460.3 million for the first quarter ended March 31, 2007, compared to the same period in 2006. This growth was driven by robust performance across all segments, particularly Healthcare and Financial Services, and expansion in the European market. Net income also saw a significant increase of 60.0% to $75.4 million, or $0.50 per diluted share. The company highlighted strong client acquisition, increasing its active client base to approximately 420 from 260 in the prior year. Despite increased investments in sales, marketing, and infrastructure to support growth, and some pressure from a strengthening Indian Rupee, the company maintained operating margins within its target range. Cognizant also continues to invest in expanding its offshore development centers in India, signaling confidence in future growth prospects.

Key Highlights

  • 1Revenue increased by 61.2% year-over-year to $460.3 million.
  • 2Net income grew by 60.0% year-over-year to $75.4 million.
  • 3Diluted earnings per share rose to $0.50 from $0.32 in the prior year.
  • 4Active client base grew significantly to 420 from 260 in the prior year.
  • 5Healthcare segment showed particularly strong revenue growth of 76.0%.
  • 6European revenue experienced substantial growth of 84.1%.
  • 7The company ended the quarter with a strong liquidity position, including $673.1 million in cash and short-term investments.

Frequently Asked Questions

Cognizant's revenue growth was primarily driven by the strong performance of its Healthcare segment (up 76%), the expansion of its service offerings allowing for cross-selling, increased penetration at existing customers, and a greater presence in the European market (revenue up 84.1%). The company also benefited from the growing demand for IT solutions and outsourcing services.

Despite increased investments in sales, marketing, and infrastructure, and the negative impact of the appreciating Indian Rupee on operating margins (approximately 0.4 percentage points), Cognizant maintained its operating margin in the targeted range of 19% to 20% when excluding stock-based compensation costs. Excluding these costs, the non-GAAP operating margin was 19.8%.

Cognizant is continuing its strategy of investing back into the business to fuel strong revenue growth. This includes hiring experienced personnel, expanding service offerings, strengthening its geographic presence, and investing approximately $200 million through the end of 2008 in new IT development centers in India. The company also highlighted its plans to transition from leased facilities to owned facilities to reduce costs.

Key risks include substantial reliance on operations in India (regulatory, economic, and political uncertainties), intense competition, potential for slowdowns in client IT spending, fluctuations in foreign currency exchange rates (particularly the Indian Rupee), and challenges in attracting and retaining skilled IT professionals due to immigration restrictions and competitive demand. The company also notes the potential impact of legal and regulatory changes.