10-QPeriod: Q2 FY2008

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 8, 2008For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial performance for the second quarter and first half of 2008, with significant year-over-year revenue and net income growth. Revenues increased by 32.7% in Q2 2008 to $685.4 million and by 36.0% for the first six months to $1.33 billion. Net income rose 26.2% in Q2 to $103.9 million and 30.4% for the first half to $205.7 million. This growth was driven by strong demand for IT services, particularly in the European market, and robust performance in the Healthcare and Manufacturing/Retail/Logistics segments. The company's operational efficiency and strategic investments are reflected in its solid income from operations, with margins remaining within or exceeding historical targets when excluding stock-based compensation and Indian fringe benefit taxes. Despite some sequential slowdown in the Healthcare segment and general economic concerns, Cognizant is well-positioned due to its global delivery model and expanding service offerings. The company also made strategic acquisitions during the period to bolster its capabilities in specific industries.

Financial Highlights

25 data points
Beta

Revenue

$685.43M

Net Income

$103.86M

15.2% Net Margin

EPS (Diluted)

$0.17

Cash & Equivalents

$521.19M

Free Cash Flow

$11.82M

Financial Statements
Beta
Revenue$685.43M
SG&A Expenses$167.10M
Operating Income$119.68M
Net Income$103.86M
EPS (Basic)$0.18
EPS (Diluted)$0.17
Shares Outstanding (Basic)579.42M
Shares Outstanding (Diluted)598.66M

Key Highlights

  • 1Revenue increased by 32.7% year-over-year to $685.4 million for Q2 2008, and by 36.0% for the first six months to $1.33 billion.
  • 2Net income grew by 26.2% year-over-year to $103.9 million for Q2 2008, and by 30.4% for the first six months to $205.7 million.
  • 3Operating margin remained strong, particularly when excluding non-cash stock-based compensation and Indian fringe benefit tax expenses, indicating efficient operations.
  • 4European market penetration showed significant growth, with revenues increasing by 83.2% year-over-year in Q2 2008.
  • 5The company expanded its client base, ending the quarter with 520 active clients, up from 430 in the prior year.
  • 6Acquisitions of Strategic Vision Consulting, Inc. and T-Systems' Indian subsidiary were completed to enhance service offerings and market reach.
  • 7Despite economic concerns, the company maintained a healthy liquidity position with $551.2 million in cash and cash equivalents and short-term investments.

Frequently Asked Questions

Cognizant's revenue growth was driven by several factors including increased penetration in the European market, strong performance in its Healthcare and Manufacturing/Retail/Logistics segments, expansion of service offerings leading to cross-selling opportunities, increased penetration at existing customers, and the overall growing market for global IT and business process outsourcing services.

Despite some concerns about a slowing economy impacting industry groups, Cognizant maintained strong profitability. Its operating margin, particularly when adjusted for stock-based compensation and Indian fringe benefit taxes, remained within its target range of 19% to 20%. The company indicated that a slowing economy might even encourage clients to adopt the cost-saving on-site/offshore delivery model.

Cognizant held $162.1 million in long-term investments in AAA-rated auction-rate municipal debt securities as of June 30, 2008. While auctions had failed since February 2008, affecting short-term liquidity, the company believed the underlying credit quality remained strong and that these securities were callable by the issuer. They anticipated not needing access to these funds for at least 12 months and recorded a temporary unrealized loss in other comprehensive income.

Cognizant is aware that its Indian tax holidays are set to expire by March 31, 2010. To mitigate this, the company is strategically locating new development centers in Special Economic Zones (SEZs), which offer tax incentives for up to 15 years. They are also monitoring policy changes related to SEZs.