Cognizant Reports Second Quarter 2017 Results

Second quarter 2017 revenue of $3.67 billion, up 8.9% over 2016

Declares quarterly cash dividend of $0.15 per share

Aug 3, 2017

TEANECK, N.J., Aug. 3, 2017 /PRNewswire/ -- Cognizant Technology Solutions Corporation (NASDAQ: CTSH), one of the world's leading professional services companies, today announced its second quarter 2017 financial results.

Cognizant Logo. (PRNewsFoto/Cognizant)

Highlights – Second Quarter 2017

  • Quarterly revenue rose to $3.67 billion, up 8.9% from the year-ago quarter and 3.5% sequentially.
  • Quarterly GAAP diluted EPS was $0.80, compared to $0.41 in the year-ago quarter.
  • Quarterly non-GAAP diluted EPS1 was $0.93, compared to $0.87 in the year-ago quarter.

Revenue for the second quarter of 2017 rose to $3.67 billion, up 8.9% from $3.37 billion in the second quarter of 2016. GAAP net income was $470 million, or $0.80 per diluted share, compared to $252 million, or $0.41 per diluted share, in the second quarter of 2016. The second quarter of 2016 GAAP EPS included the effect of incremental income tax expense related to the one-time $2.8 billion cash remittance from our subsidiary in India to non-Indian Cognizant entities. Non-GAAP diluted EPS was $0.93, compared to $0.87 in the second quarter of 2016. GAAP operating margin was 16.5% and non-GAAP operating margin1 was 20.0% for the second quarter of 2017.

"Cognizant delivered strong second-quarter results, which reflect our continued progress in helping clients achieve the value of digitizing their entire enterprises, or what we call being digital at scale," said Francisco D'Souza, Chief Executive Officer. "We remain dedicated to accelerating our shift to digital services and solutions as we continue to invest in our core business and execute our margin improvement and capital return programs."

1

Non-GAAP diluted EPS and non-GAAP operating margin exclude stock-based compensation costs and acquisition-related charges, realignment charges and, in the case of non-GAAP diluted EPS, net non-operating foreign currency exchange gains or losses, the effect of recognition of an income tax benefit previously unrecognized in our consolidated financial statements related to a specific uncertain tax position (for the six months ended June 30, 2017 only) and the effect of incremental income tax expense related to the India cash remittance transaction (for the three and six months end June 30, 2016). Reconciliations of non-GAAP diluted EPS and non-GAAP operating margin to the corresponding GAAP measures are included at the end of this release.

 

Third Quarter & Full Year 2017 Outlook

The Company is providing the following guidance:

  • Third quarter 2017 revenue expected to be in the range of $3.73 billion to $3.78 billion.
  • Third quarter 2017 non-GAAP diluted EPS2 expected to be at least $0.94.
  • Full year 2017 revenue expected to be in the range of $14.70 billion to $14.84 billion.
  • Full year 2017 non-GAAP diluted EPS expected to be at least $3.67.

"Our second quarter results and improved full year outlook demonstrate solid execution in our plan to drive sustainable revenue growth while increasing margins," said Karen McLoughlin, Chief Financial Officer. "Our strong balance sheet and cash flows continue to support both our capital return program and our investments in the business to drive future growth."

Return of Capital Program - Dividend

The Company has declared its quarterly cash dividend of $0.15 per share on Cognizant Class A Common Stock for shareholders of record at the close of business on August 22, 2017. This dividend will be payable on August 31, 2017.

Conference Call

Cognizant will host a conference call on August 3, 2017 at 8:00 a.m. (Eastern) to discuss the Company's second quarter 2017 results. To listen to the conference call, please dial (877) 810-9510 (domestically) and (201) 493-6778 (internationally) and provide the following conference passcode: "Cognizant Call."

The conference call will also be available live on the Investor Relations section of the Cognizant website at http://investors.cognizant.com.  Please go to the website at least 15 minutes prior to the call to register and to download and install any necessary audio software. An earnings supplement will also be available on the Cognizant website at the time of the conference call.

For those who cannot access the live broadcast, a replay will be available by dialing (877) 660-6853 for domestic callers or (201) 612-7415 for international callers and entering 13666130 from two hours after the end of the call until 11:59 p.m. (Eastern) on Thursday, August 17, 2017. The replay will also be available at Cognizant's website www.cognizant.com for 60 days following the call.

2

A full reconciliation of non-GAAP diluted EPS guidance to GAAP diluted EPS guidance on a forward-looking basis cannot be provided without unreasonable efforts, as we are unable to provide reconciling information with respect to acquisition-related charges, realignment charges and net non-operating foreign currency exchange gains or losses, and the tax effects of these adjustments, as well as the tax effects of stock-based compensation expense, all of which are adjustments to non-GAAP diluted EPS. The reconciling information for non-GAAP diluted EPS guidance to GAAP EPS guidance that is available without unreasonable efforts is included at the end of this release.

 

About Cognizant

Cognizant (NASDAQ-100: CTSH) is one of the world's leading professional services companies, transforming clients' business, operating and technology models for the digital era. Our unique industry-based, consultative approach helps clients envision, build and run more innovative and efficient businesses. Headquartered in the U.S., Cognizant is ranked 205 on the Fortune 500 and is consistently listed among the most admired companies in the world. Learn how Cognizant helps clients lead with digital at www.cognizant.com or follow us @Cognizant.

Forward-Looking Statements

This press release includes statements which may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate. These statements include, but are not limited to, express or implied forward-looking statements relating to our expectations regarding opportunities in the marketplace, our shift to digital solutions and services, our anticipated financial performance and our capital return and realignment programs. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, changes in the regulatory environment, including with respect to immigration and taxes, and the other factors discussed in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Cognizant undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.

About Non-GAAP Financial Measures

To supplement our financial results presented in accordance with GAAP, this press release includes references to the following measures defined by the Securities and Exchange Commission as non-GAAP financial measures: non-GAAP operating margin and non-GAAP diluted earnings per share ("non-GAAP diluted EPS"). These non-GAAP measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of Cognizant's non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated. 

We seek to manage the Company to a non-GAAP operating margin, which excludes stock-based compensation costs, acquisition-related charges and, in 2017, realignment charges. Acquisition-related charges include, when applicable, amortization of purchased intangible assets included in the depreciation and amortization expense line on our condensed consolidated statements of operations, external deal costs, acquisition-related retention bonuses, integration costs, changes in the fair value of contingent consideration liabilities, charges for impairment of acquired intangible assets and other acquisition-related costs. Realignment charges include severance costs, lease termination costs, and advisory fees related to non-routine shareholder matters and to the development of our realignment and return of capital programs, as applicable. In addition to excluding stock-based compensation costs, acquisition-related charges and, in 2017, realignment charges, our non-GAAP diluted EPS also excludes net non-operating foreign currency exchange gains or losses, inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, and,  for the six months ended June 30, 2017, the effect of recognition of an income tax benefit previously unrecognized in our consolidated financial statements. For the three and six months ended June 30, 2016, non-GAAP EPS also excludes the effect of incremental income tax expense related to the India cash remittance transaction. In all periods presented, our non-GAAP diluted EPS is additionally adjusted for the income tax impact of the above items, as applicable. The income tax impact of each item is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred.

Management believes providing investors with an operating view consistent with how it manages the Company provides enhanced transparency into the operating results of the Company. For our internal management reporting and budgeting purposes, we use non-GAAP financial measures for financial and operational decision making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures provides a meaningful supplemental measure for investors to evaluate our financial performance. Accordingly, we believe that the presentation of our non-GAAP measures, when read in conjunction with our reported GAAP results, can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.

A limitation of using non-GAAP measures versus financial measures calculated in accordance with GAAP is that non-GAAP measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and exclude costs that are recurring, namely stock-based compensation, acquisition-related charges, including amortization of purchased intangibles, and net non-operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating margin and non-GAAP diluted EPS to allow investors to evaluate such non-GAAP financial measures.

 

 

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions, except per share data)




Three Months Ended
 June 30,


Six Months Ended
 June 30,


2017


2016


2017


2016

Revenues

$

3,670



$

3,370



$

7,216



$

6,572


Operating expenses:








Cost of revenues (exclusive of depreciation and amortization expense 
     shown separately below)

2,261



2,038



4,455



3,953


     Selling, general and administrative expenses

709



654



1,395



1,300


     Depreciation and amortization expense

94



87



190



174


Income from operations

606



591



1,176



1,145


Other income (expense), net:








Interest income

31



28



63



59


Interest expense

(6)



(5)



(12)



(10)


Foreign currency exchange gains (losses), net

5



(20)



57



(11)


Other, net

(1)



1





1


Total other income (expense), net

29



4



108



39


Income before provision for income taxes

635



595



1,284



1,184


Provision for income taxes

(165)



(343)



(257)



(491)


Income from equity method investment








Net income

$

470



$

252



$

1,027



$

693


Basic earnings per share

$

0.80



$

0.42



$

1.72



$

1.14


Diluted earnings per share

$

0.80



$

0.41



$

1.71



$

1.14


Weighted average number of common shares outstanding - Basic

589



606



597



607


Dilutive effect of shares issuable under stock-based compensation plans

2



3



2



3


Weighted average number of common shares outstanding - Diluted

591



609



599



610


Dividends declared per common share

$

0.15



$



$

0.15



$



 

 

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(in millions, except par values)




June 30,
 2017


December 31,
 2016

Assets




Current assets:




Cash and cash equivalents

$

1,157



$

2,034


Short-term investments

3,221



3,135


Trade accounts receivable, net

2,680



2,556


Unbilled accounts receivable

409



349


Other current assets

632



526


Total current assets

8,099



8,600


Property and equipment, net

1,284



1,311


Goodwill

2,576



2,554


Intangible assets, net

894



951


Deferred income tax assets, net

457



425


Long-term investments

198



62


Other noncurrent assets

430



359


Total assets

$

13,938



$

14,262


Liabilities and Stockholders' Equity




Current liabilities:




Accounts payable

$

179



$

175


Deferred revenue

337



306


Short-term debt

244



81


Accrued expenses and other current liabilities

1,655



1,856


Total current liabilities

2,415



2,418


Deferred revenue, noncurrent

133



151


Deferred income tax liabilities, net

5



6


Long-term debt

747



797


Other noncurrent liabilities

155



162


Total liabilities

3,455



3,534


Stockholders' equity:




Preferred stock, $0.10 par value, 15.0 shares authorized, none issued




Class A common stock, $0.01 par value, 1,000 shares authorized, 590 and 608 shares issued 
     and outstanding at June 30, 2017 and December 31, 2016, respectively

6



6


Additional paid-in capital

128



358


Retained earnings

10,316



10,478


Accumulated other comprehensive income (loss)

33



(114)


Total stockholders' equity

10,483



10,728


Total liabilities and stockholders' equity

$

13,938



$

14,262


 

 

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

Reconciliations of Non-GAAP Financial Measures

(Unaudited)

(dollars in millions, except per share amounts)




Three Months Ended
 June 30,


Six Months Ended
 June 30,


Guidance


2017


2016


2017


2016


Q3 2017


Full Year 2017

GAAP income from operations

$

606



$

591



$

1,176



$

1,145






Add: Stock-based compensation expense (a)

55



62



109



116






Add: Acquisition-related charges (b)

35



30



69



59






Add: Realignment charges (c)

39





50








Non-GAAP income from operations

$

735



$

683



$

1,404



$

1,320


















GAAP operating margin

16.5

%


17.5

%


16.3

%


17.4

%





Effect of stock-based compensation expense

1.5



1.9



1.5



1.8





1.4% - 1.7%

Effect of acquisition-related charges

1.0



0.9



1.0



0.9





(b)

Effect of realignment charges

1.0





0.7







(c)

Non-GAAP operating margin

20.0

%


20.3

%


19.5

%


20.1

%




at least 19.5%













GAAP diluted earnings per share

$

0.80



$

0.41



$

1.71



$

1.14






Effect of above operating adjustments, pre-tax

0.22



0.15



0.38



0.29



(a), (b), (c)


(a), (b), (c)

Effect of non-operating foreign currency 
     exchange (losses) gains, pre-tax (d)

(0.01)



0.04



(0.10)



0.01



(d)


(d)

Tax effect of non-GAAP adjustments to pre-tax income (e)

(0.08)



(0.04)



(0.14)



(0.08)



(a), (b), (c), (d)


(a), (b), (c), (d)

Effect of recognition of income tax benefit 
     related to an uncertain tax position (f)





(0.09)






(0.09)

Effect of incremental income tax expense related 
     to the India Cash Remittance (g)



0.31





0.31




Non-GAAP diluted earnings per share

$

0.93



$

0.87



$

1.76



$

1.67



at least $0.94


at least $3.67

 

Notes:


(a)     Stock-based compensation expense reported in:



Three Months Ended
 June 30,


Six Months Ended
 June 30,


2017


2016


2017


2016

Cost of revenues

$

13



$

13



$

28



$

26


Selling, general and administrative expenses

42



49



81



90







Our guidance anticipates pre-tax stock-based compensation to be in the range of $0.09 to $0.10 per share for the third quarter of 2017 and $0.38 to $0.39 per share for the full year 2017. We cannot provide the tax effect of stock-based compensation on a forward-looking basis without unreasonable effort as it is subject to significant fluctuations based on the timing and number of stock options exercised by employees, the price of our stock at the time of such exercises and the price of our stock at the time of vesting of other stock-based awards.



(b)  

Acquisition-related charges include, when applicable, amortization of purchased intangible assets included in the depreciation and amortization expense line on our consolidated statements of operations, external deal costs, acquisition-related retention bonuses, integration costs, changes in the fair value of contingent consideration liabilities, charges for impairment of acquired intangible assets and other acquisition-related costs. We cannot provide acquisition-related charges on a forward-looking basis without unreasonable effort as such charges may fluctuate based on the timing, size, and complexity of future acquisitions as well as other uncertainty inherent in mergers and acquisitions.



(c)   

Realignment charges include severance costs, primarily associated with the voluntary separation program, or VSP, lease termination costs, and advisory fees related to non-routine shareholder matters and to the development of our realignment and return of capital programs, as applicable. The total costs related to the realignment are reported in "Selling, general and administrative expenses" in our consolidated statements of operations and are expected to be incurred primarily in 2017. As part of our realignment program, management is currently evaluating various strategies, including real estate consolidation and possible additional severance programs. The timing, nature and magnitude of these initiatives are not finalized at this time. As such, we cannot provide realignment charges on a forward-looking basis without unreasonable effort.



(d)   

Non-operating foreign currency exchange gains are inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes, reported in "Foreign currency exchange gains (losses), net" in our consolidated statements of operations. Non-operating foreign currency exchange gains and losses are subject to high variability and low visibility and therefore cannot be provided on a forward-looking basis without unreasonable efforts.



(e)  

Presented below are the tax impacts of each of our non-GAAP adjustments to pre-tax income:




Three Months Ended
 June 30,


Six Months Ended
 June 30,


2017


2016


2017


2016

Non-GAAP income tax benefit (expense) related to:








Stock-based compensation expense

$

20



$

15



$

41



$

27


Acquisition-related charges

12



11



24



22


Realignment charges

14





18




Foreign currency exchange gains (losses)





5



1





The effective tax rate related to each of our non-GAAP adjustments varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions.



(f)   

During the three months ended March 31, 2017, we recognized an income tax benefit previously unrecognized in our consolidated financial statements related to a specific uncertain tax position of $55 million. The recognition of the benefit in the first quarter of 2017 was based on management's reassessment regarding whether this unrecognized tax benefit met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefit.



(g)  

In May 2016, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion. As a result of this transaction, we incurred an incremental income tax expense of $190 million in the second quarter of 2016.

 

The above tables serve to reconcile the Non-GAAP financial measures to comparable GAAP measures. Please refer to the "About Non-GAAP Financial Measures" section of our press release for further information on the use of these Non-GAAP measures.

 

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

Schedule of Supplemental Information

(Unaudited)

(dollars in millions)




Three Months Ended June 30, 2017






 % Change


$


 % of total


 Sequential


 Year over Year

Revenues by Segment:








Financial Services

$

1,406



38.3

%


2.2

%


4.1

%

Healthcare

1,050



28.6

%


4.7

%


9.5

%

Products and Resources (a)

747



20.4

%


1.4

%


13.2

%

Communications, Media and Technology (b)

467



12.7

%


8.6

%


16.8

%

Total Revenues

$

3,670





3.5

%


8.9

%









Revenues by Geography:








North America

$

2,851



77.7

%


3.3

%


8.7

%

United Kingdom

288



7.8

%


5.1

%


(7.4)

%

Rest of Europe

291



7.9

%


2.1

%


22.8

%

Europe - Total

579



15.8

%


3.6

%


5.7

%

Rest of World

240



6.5

%


6.2

%


21.2

%

Total Revenues

$

3,670





3.5

%


8.9

%















Six Months Ended June 30, 2017









 % Change


$


 % of total





 Year over
Year

Revenues by Segment:









Financial Services

$

2,782



38.6

%





5.5

%

Healthcare

2,053



28.5

%





9.6

%

Products and Resources (a)

1,484



20.6

%





14.8

%

Communications, Media and Technology (b)

897



12.4

%





16.6

%

Total Revenues

$

7,216








9.8

%










Revenues by Geography:









North America

$

5,612



77.8

%





9.6

%

United Kingdom

562



7.8

%





(7.9)

%

Rest of Europe

576



8.0

%





24.4

%

Europe - Total

1,138



15.8

%





6.1

%

Rest of World

466



6.5

%





23.3

%

Total Revenues

$

7,216








9.8

%






















Employee Metrics:


June 30, 2017


March 31, 2017


June 30, 2016

Number of employees


256,800


261,200


244,300











Notes:

(a)  

Previously referred to as Manufacturing/Retail/Logistics.

(b)    

Previously referred to as Other.


 

 

COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)




Three Months Ended
 June 30,


Six Months Ended
 June 30,


2017


2016


2017


2016

Cash flows from operating activities:








Net income

$

470



$

252



$

1,027



$

693


Adjustments for non-cash income and expenses

157



123



278



337


Changes in assets and liabilities

(106)



(9)



(507)



(592)


Net cash provided by operating activities(a)

521



366



798



438


Cash flows from investing activities:








Purchases of property and equipment

(60)



(75)



(126)



(139)


Net sales (purchases) of investments

(329)



124



(166)



30


Payments for business combinations, net of cash acquired



(81)



(6)



(151)


Net cash provided by (used in) investing activities

(389)



(32)



(298)



(260)


Cash flows from financing activities:








Repurchases of common stock

(30)



(77)



(1,544)



(335)


Net change in borrowings and capital lease obligations

(221)



(114)



108



(377)


Dividends paid

(89)





(89)




Issuance of common stock under stock-based compensation plans

43



41



104



91


Net cash (used in) financing activities(a)

(297)



(150)



(1,421)



(621)


Effect of exchange rate changes on cash and cash equivalents

14



(24)



44



2


(Decrease) in cash and cash equivalents

(151)



160



(877)



(441)


Cash and cash equivalents, beginning of year

1,308



1,524



2,034



2,125


Cash and cash equivalents, end of period

$

1,157



$

1,684



$

1,157



$

1,684


 

 

SUPPLEMENTAL CASH FLOW INFORMATION

(in millions)





Three Months Ended

Stock Repurchases under Board of Directors' authorized stock 
     repurchase program:


June 30, 2017


March 31, 2017


June 30, 2016

Shares repurchased(b)




21.5



0.8









Remaining authorized balance


$

2,000

















Notes:

(a)  

In March 2016, the FASB issued an update to the standard on stock compensation, which among other things, changed the classification of the excess tax benefits and deficiencies in the statement of cash flows to cash flows from operating activities. We adopted this standard on January 1, 2017 and conformed prior year presentation. This resulted in a $7 million reduction in net cash used in financing activities and a $7 million increase in the net cash provided by operating activities for the three months ended June 30, 2016 and a $10 million reduction in net cash used in financing activities and a $10 million increase in the net cash provided by operating activities for the six months ended June 30, 2016.



(b)  

In March 2017, we entered into accelerated share repurchase agreements, referred to collectively as the ASR with certain financial institutions. Under the terms of the ASR and in exchange for up-front payments of $1.5 billion, the financial institutions initially delivered 21.5 million shares, a portion of total expected shares to be repurchased under the ASR. The total number of shares ultimately delivered is determined at the end of the applicable purchase periods under the ASR based on the volume-weighted average price of our common stock during such periods. The ASR purchase periods are scheduled to end during the third quarter of 2017.

 

SOURCE Cognizant Technology Solutions Corporation

For further information: David Nelson, VP, Investor Relations & Treasurer, 201-498-8840, david.nelson@cognizant.com

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