10-QPeriod: Q2 FY2016

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q2 Ended Jun 30, 2016

Filed August 5, 2016For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported its second-quarter 2016 financial results on August 5, 2016. The company demonstrated consistent revenue growth, with a 9.2% increase year-over-year to $3.37 billion for the quarter. This growth was driven by strong performance in its Manufacturing/Retail/Logistics and Other segments, as well as continued demand for digital technologies and consulting services across its key geographic markets, particularly North America. However, net income saw a significant decline of 39.9% to $252.4 million, largely due to a one-time incremental income tax expense of $190 million related to an India Cash Remittance transaction. Despite this, the company's non-GAAP diluted earnings per share showed an increase of 10.1% to $0.87, indicating underlying operational strength. Cognizant also highlighted its ongoing investment in talent and service offerings, strategic client expansion, and plans for opportunistic acquisitions. The company maintained a strong liquidity position with substantial cash and short-term investments.

Financial Highlights

48 data points
Beta

Revenue

$3.37B

Net Income

$252.00M

7.5% Net Margin

EPS (Diluted)

$0.41

Total Assets

$13.14B

Cash & Equivalents

$1.68B

Free Cash Flow

$291.00M

Financial Statements
Beta
Revenue$3.37B
SG&A Expenses$654.00M
Operating Income$591.00M
Interest Expense$5.00M
Net Income$252.00M
EPS (Basic)$0.42
EPS (Diluted)$0.41
Shares Outstanding (Basic)606.00M
Shares Outstanding (Diluted)609.00M

Key Highlights

  • 1Revenue grew by 9.2% to $3.37 billion in Q2 2016 compared to the prior year's quarter.
  • 2Net income decreased by 39.9% to $252.4 million, primarily impacted by a $190 million incremental income tax expense from an India Cash Remittance.
  • 3Non-GAAP diluted earnings per share increased by 10.1% to $0.87, demonstrating operational resilience.
  • 4Manufacturing/Retail/Logistics and Other segments showed robust revenue growth at 14.2% and 11.2% respectively.
  • 5The company repurchased $50 million of its Class A common stock during the quarter, with an expanded repurchase program authorized through December 31, 2018.
  • 6A $27.4 million pre-tax loss was recognized on an amended fixed-price healthcare contract.
  • 7Cash, cash equivalents, and short-term investments stood at $4.48 billion as of June 30, 2016, indicating strong liquidity.

Frequently Asked Questions

The substantial decrease in net income was primarily driven by a one-time incremental income tax expense of $190 million related to an India Cash Remittance transaction. This transaction involved the repurchase of shares by Cognizant's principal operating subsidiary in India.

Cognizant generates a significant portion of its revenue from North America, which mitigates overall currency risk. For costs denominated in Indian Rupees, the company utilizes foreign exchange forward contracts designated as cash flow hedges to partially offset exchange rate movements. They also use forward contracts to hedge balance sheet exposure to foreign currency-denominated assets and liabilities.

Cognizant plans to continue investing in its talent and new service offerings, particularly in digital technologies. They aim to increase their share of existing customers' IT spending by providing innovative solutions, expand their business in Europe, the Middle East, Asia Pacific, and Latin America, grow their strategic customer base, and opportunistically pursue acquisitions that enhance service delivery, geographic presence, or technological capabilities.

Key risks mentioned include competition, potential decline in operating margins, security breaches, compliance with data protection laws, loss of customers, rapid technological changes, mispricing of services (especially on fixed-price contracts), integration risks from acquisitions, system failures, loss of key executives, competition for talent, industry-specific risks in financial services and healthcare, currency fluctuations (including the impact of Brexit), and potential repatriation of foreign earnings and associated taxes.