10-QPeriod: Q1 FY2011

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2011

Filed May 5, 2011For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation reported strong financial performance for the first quarter ended March 31, 2011, with a significant increase in revenue and net income compared to the same period in the prior year. Revenue surged by 42.9% to $1.37 billion, driven by robust growth across all business segments and strong penetration in the European market. Net income rose by 37.5% to $208.3 million, translating to diluted earnings per share of $0.67. The company highlighted increased customer spending on discretionary development projects and an expansion of its service offerings as key growth drivers. Cognizant also saw an increase in its active client base and continued to grow its strategic client relationships. Despite increased operating expenses, primarily due to higher compensation and benefits costs to support its growing workforce, the company managed to improve its operating margin slightly. The financial position remains strong with substantial cash and short-term investments.

Financial Highlights

45 data points
Beta

Revenue

$1.37B

Net Income

$208.33M

15.2% Net Margin

EPS (Diluted)

$0.34

Total Assets

$4.64B

Cash & Equivalents

$1.29B

Free Cash Flow

-$10.19M

Financial Statements
Beta
Revenue$1.37B
SG&A Expenses$296.33M
Operating Income$265.37M
Net Income$208.33M
EPS (Basic)$0.34
EPS (Diluted)$0.34
Shares Outstanding (Basic)608.08M
Shares Outstanding (Diluted)623.61M

Key Highlights

  • 1Revenue increased by 42.9% year-over-year to $1.37 billion.
  • 2Net income grew by 37.5% year-over-year to $208.3 million.
  • 3Diluted earnings per share were $0.67, up from $0.49 in the prior year.
  • 4Operating margin slightly improved to 19.4% from 19.1% year-over-year.
  • 5The company's active client base grew to 714 from 597 in the prior year.
  • 6Significant investments are being made in new facilities, with approximately $500 million planned for India development centers by the end of 2014.
  • 7Cash and cash equivalents and short-term investments totaled $2.17 billion as of March 31, 2011, indicating strong liquidity.

Frequently Asked Questions

Cognizant's revenue growth was primarily driven by strong performance across all business segments, increased customer spending on discretionary development projects, expansion of service offerings leading to cross-selling opportunities, deeper penetration with existing customers (including strategic clients), and continued market acceptance of global IT services and business process outsourcing.

The expiration of tax holiday benefits for export activities within Software Technology Parks (STPs) in India led to a significant increase in Cognizant's effective income tax rate. The rate rose from 15.2% in Q1 2010 to 25.7% in Q1 2011. While new development centers in Special Economic Zones (SEZs) offer tax incentives, profits generated within SEZs are also subject to Minimum Alternative Tax (MAT).

Cognizant uses foreign exchange forward contracts to manage foreign currency exchange rate risk. These include designated cash flow hedges for certain salary payments in India to offset the impact of exchange rate movements on operating costs. Additionally, they use undesignated contracts to hedge balance sheet exposure to Indian Rupee-denominated net monetary assets. The company also manages this risk by limiting its net monetary asset exposure in its Indian subsidiaries.

Cognizant expects continued demand for IT solutions, with a focus on cost containment projects and discretionary development. Key priorities include investing in talent and new service offerings, deepening customer relationships, expanding business in Europe and Asia Pacific, increasing its strategic customer base, opportunistic acquisitions, maintaining cost discipline, and leveraging SEZ tax incentives for new facilities.