This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Cognizant Technology Solutions Corp. (CTSH) on February 7, 2008.
Management:
President and CEO: Francisco D''Souza
COO and CFO: Gordon Coburn
IR - Financial Dynamics: Scott Hoffman
Key Investors Issues
- EPS were 32 cents per share compared to 23 cents per share last year.
- Net income rose to $96.3 million compared to $69.5 million during the same period a year earlier.
- Revenue increased to $600 million from $424.4 million a year ago.
Fourth Quarter Highlights
Revenue exceeded prior guidance and expectations due to continued strength in Europe and the earlier than anticipated closure of the marketRx acquisition.
- Revenue grew 7.4% sequentially and 41% year-over-year.
- MarketRx contributed $5 million of revenues.
Financial Services'' segment, which includes practices and insurance, banking and transaction processing grew by over $84 million year-over-year and represented 47% of revenue.
- Healthcare grew almost $38 million and represented 24% of revenues.
- Retail, manufacturing and logistics grew by over $29 million, representing approximately 15% of revenues. The remaining 14% of revenues came primarily from other service-oriented industries of communications, media, and new technology, which grew by over $24 million, compared to the fourth quarter last year.
- Financial Services grew 42% year-over-year and about 9% sequentially.
- Healthcare grew 35% year-over-year and almost 12% sequentially. Growth in healthcare segment was driven by continued expansion of work the company does for life sciences clients as well as earlier than anticipated closing of the marketRx acquisition. The company saw manufacturing logistics grew by over 50% year-over-year and was up sequentially and other segment grew 40% year-over-year and 4% sequentially.
- Application management represented 51% of revenues and application development was 49%. All services continued to grow.
- On a quarterly sequential basis, management grew 6% and development grew 8% reflecting continued demand for entire service offerings including discretionary development work.
- 81% of revenue came from clients in North America. Europe was 18% of total revenue. The remaining 1% of revenue came from the Asian markets.
- European business grew 15% sequentially and 89% year-over-year as the company continues to invest in that region.
- The company had a gross addition of 82 new customers, about half of which were from acquisition of marketRx. The company closed the quarter with an active customer base of close to 500 clients.
On a GAAP basis, cost of revenues exclusive of depreciation and amortization increased about 47% as compared to fourth quarter of 2006.
- Fourth quarter cost of revenues included approximately $4.8 million of stock-based compensation expense as well as $2 million of non-cash expense related to the accounting for Indian fringe benefit tax expense recovered from employees which is related to the exercise of stock options.
- The total India fringe benefit expense of $5.9 million recognized, part of which is in cost of goods sold, part of which is in SG&A, represents the accounting impact to the last nine months of 2007 of the conversion of a portion of the taxation in India of employee stock option gains from the employee tax to a company paid fringe benefit tax, which is then recovered from the employees.
- Based on the initial regulations and the December clarifications, the company is treating the tax payments made by Cognizant as an operating expense and the equivalent amounts recovered from the employee as option exercise proceeds, which are booked directly to equity. So therefore expense goes through the P&L but the cash proceeds are equity. There is no cash impact, and no economic impact from this new taxation. It is purely an accounting issue.
The increase in cost of revenues is primarily due to additional technical staff both onsite and offshore required to support revenue growth as well as the impact of the strengthening Rupee.
The company increased technical staff by more than 6,200 during the quarter and ended the quarter with approximately 52,100 technical staff. This is a net increase of almost 15,700 technical staff from December 31, 2006.
SG&A depreciation and amortization expenses were $152.3 million on a GAAP basis, up from a $115.5 million in the prior year.
GAAP SG&A expense included approximately $5 million of stock-based compensation expense and $3.2 million related to the fringe benefit tax.
- GAAP operating income increased 39% to $106 million from $76.4 million in the fourth quarter of 2006.
- On a non-GAAP basis, which excludes the impact of $9.8 million of stock-based compensation expense and $5.9 million of fringe benefit tax, operating income r was $121.8 million, up 44% from last year.
- GAAP operating margin, including the fringe benefit tax was 17.7%.
