10-QPeriod: Q2 FY2013

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2013

Filed August 7, 2013For Securities:CTSH

Summary

Cognizant Technology Solutions Corp. (CTSH) reported a strong second quarter and first half of 2013, demonstrating robust revenue and net income growth compared to the prior year. Revenue increased by 20.4% year-over-year for the quarter and 19.3% for the first half, driven by strong performance across all business segments and continued demand for its IT services and BPO solutions. The company saw significant growth in its Manufacturing/Retail/Logistics and Financial Services segments, as well as in its European and Rest of World markets. Profitability also improved, with operating margins expanding due to revenue growth outpacing headcount growth and favorable foreign currency movements. Diluted EPS showed a healthy increase, reflecting the company's operational efficiency and effective cost management. Cognizant continues to invest in its talent base, service offerings, and geographic expansion, while also returning capital to shareholders through its share repurchase program. The company maintains a strong liquidity position with substantial cash, cash equivalents, and short-term investments.

Financial Highlights

45 data points
Beta

Revenue

$2.16B

Net Income

$300.41M

13.9% Net Margin

EPS (Diluted)

$0.49

Total Assets

$7.01B

Cash & Equivalents

$1.68B

Free Cash Flow

$315.23M

Financial Statements
Beta
Revenue$2.16B
SG&A Expenses$420.53M
Operating Income$426.80M
Net Income$300.41M
EPS (Basic)$0.50
EPS (Diluted)$0.49
Shares Outstanding (Basic)603.34M
Shares Outstanding (Diluted)608.89M

Key Highlights

  • 1Revenue for the second quarter of 2013 increased by 20.4% to $2.16 billion, with first half revenue up 19.3% to $4.18 billion, demonstrating consistent growth.
  • 2Net income saw a substantial increase of 19.2% in Q2 to $300.4 million and 18.0% for the first half to $584.6 million, indicating improved profitability.
  • 3Diluted earnings per share rose to $0.99 for Q2 (up from $0.82 in Q2 2012) and $1.92 for the first half (up from $1.61 in H1 2012).
  • 4Operating margin improved to 19.7% in Q2 (from 18.5% in Q2 2012), driven by revenue growth outpacing headcount growth and favorable currency impacts.
  • 5The company expanded its client base, serving approximately 1,100 active clients by the end of Q2 2013, up from 815 in the prior year.
  • 6Significant investments in India's real estate development program continue, with expected expenditures of $400 million globally for capital expenditures in 2013.
  • 7Cognizant repurchased $115.2 million of its Class A common stock during the second quarter, demonstrating commitment to shareholder returns.

Frequently Asked Questions

Cognizant's revenue growth was driven by strong performance across all business segments, particularly Manufacturing/Retail/Logistics and Financial Services, continued penetration in European and Rest of World markets, increased customer spending on discretionary projects, expansion of service offerings (Consulting, IT IS, BPO), and increased penetration at existing customers. The global delivery model's increasing acceptance also played a key role.

Cognizant's operating margin improved to 19.7% in Q2 2013. This was achieved through revenue growth outpacing headcount growth, the strategic shift of annual salary increases to the third quarter, and the favorable impact of the depreciation of the Indian rupee against the U.S. dollar, partially offset by losses on cash flow hedges. The company continues to invest in its business, aiming to maintain targeted non-GAAP operating margins.

Cognizant is actively returning capital to shareholders through its stock repurchase program. In Q2 2013, the company repurchased $115.2 million of its Class A common stock. The Board of Directors also approved an expansion and extension of the stock repurchase program, increasing the authorization to $1.5 billion and extending its term to December 31, 2014. The company also maintains substantial cash, cash equivalents, and short-term investments to fund operations, investments, and potential acquisitions.

Key risks include the company's substantial operations in India, exposure to foreign currency fluctuations (particularly the Indian Rupee), intense competition in the IT services industry, dependence on a few large customers, potential impact of economic conditions in North America and Europe, and the risks associated with managing global operations, legal and regulatory compliance, and immigration restrictions. The company also notes the potential impact of intellectual property claims and cybersecurity risks.