10-QPeriod: Q2 FY2011

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2011

Filed August 4, 2011For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported strong financial performance for the second quarter and first half of 2011, driven by robust revenue growth across all business segments. Total revenues for the quarter ending June 30, 2011, increased by 34.4% year-over-year to $1.49 billion, and for the first half of the year, revenues grew by 38.3% to $2.86 billion. This growth was fueled by increased customer spending on IT services, expansion of service offerings, and penetration in key markets like Europe. Net income also saw significant increases, reaching $208.0 million ($0.67 per diluted share) for the quarter and $416.4 million ($1.34 per diluted share) for the first half of 2011. Despite an increase in operating expenses, primarily due to higher compensation costs and investments in business growth, the company maintained healthy operating margins. The company also highlighted its strategic client growth and expansion of its global delivery model as key drivers of its continued success. Cognizant ended the period with a strong liquidity position, including over $2.2 billion in cash and short-term investments.

Financial Highlights

45 data points
Beta

Revenue

$1.49B

Net Income

$208.04M

14.0% Net Margin

EPS (Diluted)

$0.34

Total Assets

$4.92B

Cash & Equivalents

$1.19B

Free Cash Flow

$181.38M

Financial Statements
Beta
Revenue$1.49B
SG&A Expenses$326.72M
Operating Income$269.96M
Net Income$208.04M
EPS (Basic)$0.34
EPS (Diluted)$0.34
Shares Outstanding (Basic)607.98M
Shares Outstanding (Diluted)622.95M

Key Highlights

  • 1Revenue surged 34.4% year-over-year to $1.49 billion in Q2 2011.
  • 2Net income increased to $208.0 million ($0.67 diluted EPS) in Q2 2011, up from $172.2 million ($0.56 diluted EPS) in Q2 2010.
  • 3Operating margin remained strong, with non-GAAP operating margin (excluding stock-based compensation) at 19.8% for Q2 2011.
  • 4Strong performance across all business segments, with Manufacturing/Retail/Logistics showing the highest growth at 44.9% in Q2.
  • 5European revenue grew significantly by 38.3% in Q2 2011, indicating successful market penetration.
  • 6The company added six strategic clients, bringing the total to 179, and ended the quarter with 721 active clients.
  • 7Cash and cash equivalents and short-term investments totaled $2.27 billion as of June 30, 2011, indicating a strong liquidity position.

Frequently Asked Questions

Revenue growth was driven by strong performance across all business segments, increased customer spending on discretionary development projects, expansion of service offerings, increased penetration at existing customers (including strategic clients), and continued market acceptance of global IT services and business process outsourcing.

Operating margin was 18.2% for Q2 2011. While revenue grew significantly, operating expenses, particularly compensation costs and investments for business growth, also increased. The appreciation of the Indian Rupee against the US Dollar also had a negative impact. However, operating efficiencies and favorable foreign exchange hedge settlements helped offset some of these pressures. Excluding stock-based compensation, the non-GAAP operating margin was 19.8%, which was within the company's targeted range.

The company expects continued demand for IT services, driven by stabilization of global economic conditions, normalization of customer IT budgets, and continued focus on cost containment projects. However, they also anticipate potential challenges such as continued volatility in foreign currency rates and an increase in the effective income tax rate due to the expiration of Indian tax holidays.

Cognizant has a substantial portion of its operations and employees in India. The company is investing in real estate development for new centers in India, primarily in Special Economic Zones (SEZs) to take advantage of tax incentives. They also actively manage foreign currency risks, particularly with the Indian Rupee, through hedging strategies and by limiting net monetary asset exposure. The company acknowledges the risks associated with international operations, including regulatory, economic, and political uncertainties.