10-QPeriod: Q3 FY2007

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q3 Ended Sep 30, 2007

Filed November 9, 2007For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial results for the third quarter and the first nine months of 2007. Revenue growth was robust, increasing by 48.0% year-over-year for the quarter and 53.6% for the nine-month period. This growth was driven by strong performance across all business segments, particularly Manufacturing/Retail/Logistics and Other, as well as continued expansion in Financial Services and Healthcare. The company also saw significant revenue growth in the European market. Net income also showed substantial increases, rising 57.6% for the quarter and 55.5% for the nine months. While operating margins experienced slight pressure due to factors like Indian Rupee appreciation and wage inflation, the company maintained its target non-GAAP operating margin range. Cognizant continues to invest in expanding its service offerings and geographic presence, evidenced by significant capital expenditures on new development centers in India. The company ended the quarter with a strong liquidity position and anticipates no near-term liquidity issues.

Key Highlights

  • 1Strong revenue growth of 48.0% year-over-year for Q3 2007 and 53.6% for the first nine months of 2007.
  • 2Net income increased significantly, up 57.6% for Q3 and 55.5% for the first nine months compared to the prior year periods.
  • 3Robust growth across all segments, with Manufacturing/Retail/Logistics and Other segments showing particularly high growth rates (56% and 54% respectively for Q3).
  • 4Significant expansion in the European market, with revenue increasing by 91.8% year-over-year for Q3.
  • 5The company continues to invest in infrastructure, with approximately $300 million planned for new IT development centers in India through the end of 2009.
  • 6Strong liquidity position with $809.3 million in cash and short-term investments and $1,067.2 million in working capital as of September 30, 2007.
  • 7A two-for-one stock split was declared, to be effected by a 100% stock dividend in October 2007, and a new $100 million share repurchase program was authorized.

Frequently Asked Questions

Cognizant's revenue growth was driven by multiple factors including the strong performance of its Manufacturing/Retail/Logistics and Other segments, continued strength in Financial Services and Healthcare, expansion of service offerings leading to cross-selling, increased penetration at existing customers, and significant growth in the European market. The increasing market acceptance of the offshore IT software and services delivery model also played a key role.

The appreciation of the Indian Rupee against the U.S. Dollar had a negative impact on Cognizant's operating margins during Q3 2007, decreasing it by approximately 0.4 percentage points. Approximately 32% of their global costs were denominated in Indian Rupees. The company is implementing actions to mitigate these cost trends, including increasing global utilization rates and reducing discretionary spending.

Cognizant is significantly investing in its physical infrastructure, particularly in India. They have a real estate development program that includes planned construction of over four and a half million square feet of new space, with an expenditure of approximately $300 million expected through the end of 2009. This expansion is focused on building new IT development centers in Special Economic Zones and expanding capacity in existing locations.

While Cognizant's top five and top ten customers accounted for approximately 23.6% and 34.2% of total revenues in Q3 2007, respectively, the company expects this percentage to decline over time as they add new customers and increase penetration at existing ones. The company had 445 active clients as of September 30, 2007, an increase from 330 in the prior year.