10-QPeriod: Q1 FY2008

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 12, 2008For Securities:CTSH

Summary

Cognizant Technology Solutions Corp. (CTSH) reported strong year-over-year revenue growth of 39.7% for the first quarter of 2008, reaching $643.1 million. Net income also saw a significant increase, rising to $101.9 million, or $0.34 per diluted share, compared to $75.4 million, or $0.25 per diluted share, in the prior year. The company experienced robust growth across all its major segments, with notable strength in the Healthcare and Other segments, as well as significant expansion in the European market. Despite overall positive financial performance, the company noted potential headwinds from the weakening U.S. economy, particularly impacting its Financial Services segment. Management also highlighted concerns regarding currency fluctuations, specifically the appreciation of the Indian Rupee against the U.S. Dollar, which put pressure on operating margins. Cognizant continues to invest in its growth, with significant capital expenditures planned for its India development centers.

Key Highlights

  • 1Revenue increased by 39.7% to $643.1 million in Q1 2008 compared to Q1 2007.
  • 2Net income rose by 35.0% to $101.9 million in Q1 2008 compared to Q1 2007.
  • 3Diluted earnings per share grew to $0.34 in Q1 2008 from $0.25 in Q1 2007.
  • 4Strong revenue growth observed across all segments: Financial Services (36.5%), Healthcare (45.1%), Manufacturing/Retail/Logistics (39.7%), and Other (41.2%).
  • 5European revenue experienced substantial growth of 87.5% year-over-year.
  • 6Active client count increased to 505 as of March 31, 2008, up from 420 as of March 31, 2007.
  • 7Company holds $170.4 million in auction-rate securities, which experienced failed auctions and are now classified as long-term investments.

Frequently Asked Questions

Cognizant reported a significant increase in revenue, up 39.7% year-over-year to $643.1 million. Net income also grew substantially by 35.0% to $101.9 million. Diluted earnings per share rose from $0.25 to $0.34.

Key drivers include strong demand for IT solutions and business process outsourcing, increased penetration in the European market (which saw 87.5% revenue growth), robust performance in the Healthcare and Other segments, expansion of service offerings, and increased penetration at existing customers. The company also noted continued market acceptance of the offshore IT services delivery model.

Management highlighted concerns about a weakening U.S. economy, particularly impacting the Financial Services segment. Additionally, the appreciation of the Indian Rupee against the U.S. Dollar is pressuring operating margins. The company also disclosed that its $170.4 million investment in auction-rate securities is currently illiquid due to failed auctions, although they believe the underlying credit quality remains strong.

The company is facing cost pressures from wage inflation in India and the appreciation of the Indian Rupee. To mitigate this, Cognizant is optimizing global utilization rates, controlling discretionary spending, and investing in expanding its service offerings and geographic presence. They aim to maintain an operating margin of 19-20% (excluding stock-based compensation) by reinvesting profitability back into the business.