This summary is based on the second quarter fiscal 2008 earnings call conducted by Cognizant Technology Solutions Corporation (CTSH) on July 31, 2008.
Management:
Financial Dynamics, IR: Hannah Sloane
President and CEO: Francisco D''Souza
COO and CFO: Gordon Coburn
Key Investors Issues
- EPS were 35 cents a share compared to 27 cents a share last year.
- Earnings were $103.9 million compared to earnings of $82.3 million in the year-ago period.
- Revenue rose 33% to $685.4 million.
Second Quarter Highlights
Revenue grew 6.6% sequentially and 33% year-over-year.
- Financial services segment, which includes practices and insurance, banking, and transaction processing grew by over $71 million year-over-year and represented 45.8% of revenue.
- Healthcare grew by almost $46 million and represented 24% revenues.
- Retail manufacturing and logistics grew by over $29 million, and represented 15.6% revenues. The remaining 14.6% of revenues came primarily from other service oriented industries of communications, media, and new technology, which grew by over $22 million compared to last year.
- Application management represented 53% of revenues and application development was 47%. Both services continue to grow.
- Application management grew 34% year-over-year and over 8% sequentially.
- Development grew 32% year-over-year and almost 5% sequentially. In sequential strength and application maintenance was driven by clients seeking to optimize efficiencies on non-discretionary spending due to budget concerns.
- Over 78% of revenue clients in North America and for the first time Europe made up over 20% of total quarterly revenue at 20.3%. 1% and 1.5% of revenue came from the Asian market. European business grew almost 15% sequentially and over 83% year-over-year for the quarter, as a result of continued investment in that region.
- The company had a gross addition of 63 new customers.
- The company closes the quarter with 520 active customers.
The number of accounts, which the company considers to be strategic and have the potential to ramp up to at least $5 million to more than $50 million and annual revenue, increased by five with the total number of strategic clients to 118.
- GAAP basis cost of revenues exclusive of depreciation and amortization increased about 30% as compared to the second quarter of 2007.
- Cost of revenues included approximately $4.7 million of stock-based compensation expense, as well as $2.1 million of non-cash expenses related to the accounting for Indian fringe benefit tax expense recover from employees related to the exercise the stock options.
- The Indian fringe benefit expenses represent the timing impact of conversion of a portion of taxation in India from employees'' stock option of employee stock option gains with an employee income tax to a company paid fringe benefit tax which has then recovered from the employee. The company is treating this tax payment made by Cognizant as it operating expense and the equivalent covered from the employee as the option exercise proceeds which are booked directly to equity.
- There is no cash impact to the company from this taxation. The increases in cost of revenues are primarily due to additional technical staff both onsite and offshore required to support revenue growth. The company increased technical staff by more than 1,100 and ended the quarter with approximately 55,500 technical staff.
- SG&A, depreciation and amortization expenses were $184.9 million on a GAAP basis, up from $133.5 million in the second quarter of last year. GAAP, SG&A expense included approximately $5.7 million of stock-based compensation expense and $3.8 million of non-cash expense related to the Indian fringe benefit taxes.
- GAAP operating income increased 32% to $119.7 million, from $90.7 million in the second quarter of 2007.
- On a non-GAAP basis, which excludes the impact of $10.5 million of stock-based compensation expense and $5.9 million of non-cash fringe benefit tax expense; operating income was $136.1 million, up 35.8% from last year.
- GAAP operating margin was 17.5% and non-GAAP operating margin, which excludes stock-based compensation expense and stock-based non-cash Indian fringe benefit expense was 19.8%, within target range of 19% to 20%.
- The average rate for the Indian rupee was approximately 41.6 versus 39.7 in the first quarter of 2008. The company is committed to maintaining investments in the business in order to generate growth and position best for when the economy recovers.
- The company accelerated several of its investment programs mostly the hiring of client facing challenge and industry expertise. In addition to the benefit of the weaken rupee the company partially funded this accelerated investments by implementing annual salary increases in a phase manner with increase as per portion of population current of the end of the second quarter rather than the beginning of the quarter.
Interest income was $4.9 million, compared to $6.5 million in the second quarter of 2007, and $6.2 million in the first quarter of this year.
- Sequential interest income decreased primarily due to decline in the average, cash and investment balances as well as the meaningful decline in short term interest rates in the United States.
- The company had a $500,000 foreign exchange loss. GAAP tax rate was 16.3%, down from 16.4% tax rate in the first quarter 2008.
- Share count was $299.3 million up from 299.1 in the first quarter of 2008.
- Balance sheet remains healthy and the company finished the quarter with just over $713 million of cash, short-term and long term investments up from $645 million at the end of March. Operating activities generated approximately $75 million of cash.
- Financing activities generated approximately $39 million of cash from proceeds of options exercised and related tax benefits as well as employees stock purchase program. In addition the company spent approximately $32 million for capital expenditure and approximately $12 million towards acquisitions primarily the purchase of strategic vision consulting.
- Based on $583.1 million balance on June 30th, the company finished the quarter with a DSO including unbilled receivables of 77 days compared to 71 days with the same period of 2007 and 73 days in the first quarter of 2008. Excluding unbilled receivables DSO was approximately 70 days.
- The increase in DSO was primarily driven by new take customers a few large customers in healthcare segment, as well as the general trend of larger customers paying bill a bit slower due to the economic. The quality of receivables portfolio remains strong. Unbilled receivable balance was approximately $57.7 million at the end of the second quarter, which was down $9 million form March 31st. approximately 56% of June 30th, unbilled balance was built in July.
- Overall 25.7% of revenue came from fixed price contracts, down from 26.8% in then first quarter of 2008 and up from 25.3 in the second quarter of last year. Looking at the mix budget solution type 31% of development revenue and 21% of maintenance revenue came from fixed price contracts.
- Worldwide headcount including both technical professionals and support staff totaled approximately 59,300, of over 1,300 people from March 31 of this year, and that is almost 14,000 people from the second quarter of 2007.
- Turn over including both voluntary and involuntary was approximately 15% annualized. Attrition was down approximately 17% in the second quarter of last year.
