10-QPeriod: Q1 FY2018

COGNIZANT TECHNOLOGY SOLUTIONS CORP Quarterly Report for Q1 Ended Mar 31, 2018

Filed May 7, 2018For Securities:CTSH

Summary

Cognizant Technology Solutions Corporation (CTSH) reported its first-quarter 2018 financial results, demonstrating solid top-line growth driven by increased demand for digital services and consulting. Revenues rose by 10.3% year-over-year to $3.91 billion. The company's operating income also saw a significant increase of 21.6%, reaching $693 million, with the operating margin expanding to 17.7% from 16.1% in the prior year period. This performance reflects the company's strategic shift towards digital transformation services, which is resonating with clients seeking to adapt, compete, and grow in a rapidly evolving market. Despite the positive operational performance, net income experienced a decline of 6.6% to $520 million, primarily impacted by foreign currency exchange losses and a higher effective income tax rate in the current quarter. The company also adopted the new revenue recognition standard (ASC Topic 606) effective January 1, 2018, which had a positive impact on revenues and operating income. Investors should note the ongoing internal investigation related to potential FCPA violations and a significant tax dispute in India, which, while not currently material to financial statements, represent potential risks.

Financial Highlights

49 data points
Beta

Revenue

$3.91B

Net Income

$520.00M

13.3% Net Margin

EPS (Diluted)

$0.88

Total Assets

$15.04B

Cash & Equivalents

$1.60B

Free Cash Flow

$292.00M

Financial Statements
Beta
Revenue$3.91B
SG&A Expenses$710.00M
Operating Income$693.00M
Interest Expense$6.00M
Net Income$520.00M
EPS (Basic)$0.89
EPS (Diluted)$0.88
Shares Outstanding (Basic)587.00M
Shares Outstanding (Diluted)589.00M

Key Highlights

  • 1Revenue increased by 10.3% to $3.91 billion in Q1 2018 compared to Q1 2017.
  • 2Income from operations grew by 21.6% to $693 million, and the operating margin expanded to 17.7%.
  • 3The company adopted the new revenue recognition standard (ASC 606) effective January 1, 2018, with a positive impact on reported revenues and operating income.
  • 4Net income decreased by 6.6% to $520 million, mainly due to foreign currency exchange losses and a higher effective tax rate.
  • 5The company continued its capital return program, repurchasing shares and paying dividends.
  • 6An internal investigation into potential FCPA violations and a tax dispute in India remain ongoing, with potential future implications.
  • 7Demand for digital transformation services and consulting is strong across key segments like Healthcare and Communications, Media, and Technology.

Frequently Asked Questions

Revenue growth was primarily driven by strong demand for services related to digital technologies that are reshaping customers' business models, increased customer spending on discretionary projects, and the continued appeal of the company's global delivery model for cost optimization. Growth was particularly strong in the Healthcare and Communications, Media, and Technology segments.

Cognizant adopted ASC 606 on January 1, 2018, using the modified retrospective method. For the first quarter of 2018, this adoption had a positive impact, increasing reported revenues by $21 million, income from operations by $29 million, and diluted earnings per share by $0.04. Prior period amounts are not restated.

The key risks and contingencies include an ongoing internal investigation into potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) and other laws in India, and a significant tax dispute with the Indian Income Tax Department (ITD). While these matters did not result in material financial adjustments in this quarter, they represent potential future liabilities and could have a material adverse effect on the company's business, financial condition, results of operations, and cash flows if resolved unfavorably.

Income from operations increased significantly by 21.6% to $693 million, with the operating margin expanding to 17.7% from 16.1% in the prior year. This improvement reflects effective cost management and strong revenue growth. However, net income decreased by 6.6% to $520 million due to foreign currency exchange losses and a higher effective tax rate in the current quarter, despite the positive operational performance.