Cognizant Reports First Quarter 2020 Results
TEANECK, N.J., May 7, 2020 /PRNewswire/ -- Cognizant Technology Solutions Corporation (Nasdaq: CTSH), one of the world's leading professional services companies, today announced its first quarter 2020 financial results.
Highlights - First Quarter 2020
-- Revenue increased to $4.2 billion, up 2.8% (3.5% in constant
currency(1)) from the year-ago quarter, including a negative 50 basis
points impact from the exit of certain content services business.
-- GAAP operating margin was 13.7% compared to 13.1% in the year-ago
quarter.
-- Adjusted Operating Margin(1) was 15.1% compared to 16.0% the year-ago
quarter.
-- Net income was $367 million compared to $441 million in the year-ago
quarter.
-- Quarterly GAAP diluted EPS was $0.67 compared to $0.77 in the year-ago
quarter.
-- Quarterly Adjusted Diluted EPS(1) was $0.96 compared to $0.91 in the
year-ago quarter.
"We executed well in what was a challenging quarter, and posted our strongest quarterly signings since 2017," said Brian Humphries, Chief Executive Officer. "Amid the pandemic's unprecedented human and economic challenges, we remain focused on the health and safety of our associates whilst maintaining business continuity for our clients and supporting our communities. While we expect a challenging demand environment throughout 2020, we believe the pandemic is accelerating the secular trends of core modernization and cloud migration as companies shift to digital business models. These and other related IT trends play directly to Cognizant's strategy. I am confident we will emerge from this crisis in a position of strength."
First Quarter 2020 Performance by Business Segment
Financial Services (34.3% of revenues) revenue grew 1.0% year-over-year, or 1.8% in constant currency. Growth in banking was driven by the contribution of the previously announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform and regional banks in North America. This was partially offset by continued softness with a few of our largest banking and insurance clients.
Healthcare (28.3% of revenues) revenue grew 2.5% year-over-year, or 2.7% in constant currency. Segment revenue was driven by double-digit growth in life sciences, including the contribution of Zenith Technologies, which was acquired in July 2019. This was partially offset by a low-single digit decline in revenue within healthcare as results were negatively impacted primarily by the movement of work to a captive at a large North American client.
_______________
1 Constant currency revenue growth, Adjusted
Operating Margin and Adjusted Diluted
Earnings Per Share ("Adjusted Diluted EPS")
are not measurements of financial
performance prepared in accordance with
GAAP. See "About Non-GAAP Financial
Measures" for more information and
reconciliations to the most directly
comparable GAAP financial measures at the
end of this release.
Products and Resources (22.6% of revenues) revenue grew 4.4% year-over-year, or 5.3% in constant currency, driven by growth across retail and consumer goods, manufacturing, logistics, energy and utilities. This was partially offset by softness in the travel and hospitality industries.
Communications, Media and Technology (14.8% of revenues) revenue grew 5.2% year-over-year, or 6.3% in constant currency, driven by broad-based growth across all the industries in this segment. Revenue growth in technology was negatively impacted by our previously announced decision to exit certain portions of our content services business.
"We entered 2020 with a strong balance sheet and further strengthened our financial flexibility in the first quarter," said Karen McLoughlin, Chief Financial Officer. "Against an uncertain economic backdrop, we will continue with our 2020 Fit For Growth Plan to streamline the Company's operating model and reduce costs to fund growth investments that align to our long-term growth strategy."
COVID-19 Business Implications
During the first quarter, COVID-19-related disruptions reduced revenue in March, reflecting delays in project fulfillment as Cognizant rapidly enabled the shift to work-from-home capabilities across its delivery teams.
Entering the second quarter, the pandemic and resulting economic slowdown are dampening demand across industries, most significantly within the travel, hospitality, retail, automotive, energy, and media and entertainment. At the same time, the pivot to digital is accelerating as companies look to quickly modernize and increase their competitiveness, migrate more of their workloads to the cloud, and fundamentally rethink their core business processes.
Business Outlook
As communicated in our April 9(th) update, given the continued uncertainty around the duration of the COVID-19 pandemic and its impact on our ability to forecast performance, we are not providing guidance at this time.
Declaration of Quarterly Cash Dividend
The Company has declared a quarterly cash dividend of $0.22 per share on Cognizant Class A common stock for shareholders of record at the close of business on May 20, 2020. This dividend will be payable on May 29, 2020.
Update on Previously Reported Cyber-Security Incident
In late April, the Company announced a security incident involving its internal systems resulting from a Maze ransomware attack. The Company believes it has contained the attack and that the actor is no longer operating in the Company's environment.
Since becoming aware of the attack, the Company has taken decisive actions to remediate the threat while keeping clients regularly informed. The Company believes these measures enabled it to continue its operations in a timely and secure manner. In addition, the Company has and will continue to take any necessary steps to protect the integrity of its systems.
The Company will provide an update regarding the business interruption and financial impact of the attack on its conference call to discuss first quarter 2020 results referenced below.
Conference Call
Cognizant will host a conference call on May 7, 2020, at 5:00 p.m. (Eastern) to discuss the Company's first quarter 2020 results. To listen to the conference call, please dial (877) 810-9510 (domestically) or (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. To listen to the replay, please dial (877) 660-6853 (domestically) or (201) 612-7415 (internationally) and enter 13701787 from two hours after the end of the call until 11:59 p.m. (Eastern) on May 21, 2020. The replay will also be available at Cognizant's website www.cognizant.com for 60 days following the call.
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 193 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 that 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 the impact of the COVID-19 pandemic on our business, our expectations regarding the success of our actions to contain the ransomware attack and to protect the integrity of our systems and data, the impact of the ransomware attack on our clients, business, reputation and financial results, opportunities in the marketplace, our cost structure, investment in and growth of our business, our realignment plans, the timing, cost and impact of the 2020 Fit for Growth Plan, our and our clients' shift to digital solutions and services and our anticipated financial performance. 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, the ongoing assessment of the ransomware attack, legal, reputational and financial risks resulting from cyberattacks, including the ransomware attack, the effectiveness of business continuity plans following the ransomware attack and during the COVID-19 pandemic, the impact of the COVID-19 pandemic, 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: Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS, free cash flow, net cash and constant currency revenue growth. These non-GAAP financial 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 financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of our non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated.
Our non-GAAP financial measures, Adjusted Operating Margin, Adjusted Income From Operations and Adjusted Diluted EPS exclude unusual items. Additionally, Adjusted Diluted EPS excludes net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. 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. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. Net cash is defined as cash and cash equivalents and short-term investments less short-term and long-term debt. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period's foreign currency exchange rates measured against the comparative period's reported revenues.
Management believes providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For our internal management reporting and budgeting purposes, we use various GAAP and 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 excluding certain costs 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 financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and may exclude costs that are recurring such as our 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 our non-GAAP financial measures to allow investors to evaluate such non-GAAP financial measures.
- tables to follow -
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
Three Months Ended
March 31,
2020 2019
Revenues $
4,225 $
4,110
Operating expenses:
Cost of revenues (exclusive of
depreciation and amortization
expense shown separately
below) 2,747 2,575
Selling, general and
administrative expenses 711 871
Restructuring charges 55 2
Depreciation and amortization
expense 133 123
Income from operations 579 539
Other income (expense), net:
Interest income 41 48
Interest expense (6) (7)
Foreign currency exchange
gains (losses), net (102) 2
Other, net (2) 1
Total other income (expense),
net (69) 44
Income before provision for
income taxes 510 583
Provision for income taxes (142) (142)
Income (loss) from equity
method investment (1)
Net income $
367 $
441
Basic earnings per share $
0.67 $
0.77
Diluted earnings per share $
0.67 $
0.77
Weighted average number of
common shares outstanding -
Basic 546 573
Dilutive effect of shares
issuable under stock-based
compensation plans - 2
Weighted average number of
common shares outstanding -
Diluted 546 575
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in millions, except par values)
March 31, December 31,
2019
2020
Assets
Current assets:
Cash and cash equivalents $
3,886 $
2,645
Short-term investments 396 779
Trade accounts receivable, net 3,220 3,256
Other current assets 823 931
Total current assets 8,325 7,611
Property and equipment, net 1,322 1,309
Operating lease assets, net 927 926
Goodwill 4,014 3,979
Intangible assets, net 1,005 1,041
Deferred income tax assets, net 594 585
Long-term investments 433 17
Other noncurrent assets 809 736
Total assets $
17,429 $
16,204
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $
289 $
239
Deferred revenue 354 313
Short-term debt 38 38
Operating lease liabilities 197 202
Accrued expenses and other current
liabilities 1,994 2,191
Total current liabilities 2,872 2,983
Deferred revenue, noncurrent 42 23
Operating lease liabilities,
noncurrent 734 745
Deferred income tax liabilities, net 31 35
Long-term debt 2,430 700
Long-term income taxes payable 478 478
Other noncurrent liabilities 229 218
Total liabilities 6,816 5,182
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, 541 and 548
shares issued and outstanding as of
March 31, 2020 and December 31, 2019,
respectively 5 5
Additional paid-in capital 41 33
Retained earnings 10,831 11,022
Accumulated other comprehensive income
(loss) (264) (38)
Total stockholders' equity 10,613 11,022
Total liabilities and stockholders'
equity $
17,429 $
16,204
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Reconciliations of Non-GAAP Financial Measures
(Unaudited)
(dollars in millions, except per share amounts)
Three Months Ended
March 31,
2020 2019
GAAP income from operations $
579 $
539
Realignment charges(a) 20 2
2020 Fit for Growth Plan
restructuring charges(b) 35
COVID-19 Charges(c) 6
Incremental accrual related
to the India Defined
Contribution Obligation(d) - 117
Adjusted Income From
Operations $
640 $
658
GAAP operating margin 13.7 13.1
% %
Realignment charges 0.5
2020 Fit for Growth Plan
restructuring charges 0.8
Covid-19 Charges 0.1
Incremental accrual related
to the India Defined
Contribution Obligation - 2.9
Adjusted Operating Margin 15.1 16.0
% %
GAAP diluted earnings per
share $
0.67 $
0.77
Effect of above
adjustments, pre-tax 0.11 0.20
Non-operating foreign
currency exchange (gains)
losses, pre-tax(e) 0.19 (0.01)
Tax effect of above
adjustments (f) (0.01) (0.05)
Adjusted Diluted Earnings
Per Share $
0.96 $
0.91
Notes:
---
(a) During the three months ended March 31, 2020, we
incurred realignment charges that include $6 million in
employee retention costs and $14 million in
professional fees. The total costs related to the
realignment are reported in "Restructuring charges" in
our unaudited consolidated statements of operations.
(b) During the three months ended March 31, 2020, we
incurred restructuring charges as part of our 2020 Fit
for Growth Plan that include $26 million in employee
separation costs, $5 million in facility exit costs and
$4 million in employee retention costs. These charges
include $11 million of costs incurred related to our
exit from certain content-related services. The total
costs related to the 2020 Fit for Growth Plan are
reported in "Restructuring charges" in our unaudited
consolidated statements of operations.
(c) During the three months ended March 31, 2020, we
incurred costs in response to the COVID-19 pandemic
that include a one-time bonus to our employees at the
designation of associate and below in both India and
the Philippines and costs to enable our employees to
work remotely and provide medical staff and extra
cleaning services for our facilities. Substantially all
of the costs related to the pandemic are reported in
"Cost of revenues" in our unaudited consolidated
statements of operations.
(d) During the three months ended March 31, 2019, a ruling
of the Supreme Court of India interpreting certain
statutory defined contribution obligations of employees
and employers (the "India Defined Contribution
Obligation") altered historical understandings of such
obligations, extending them to cover additional
portions of the employee's income. As a result, the
ongoing contributions of our affected employees and the
Company have increased. In the first quarter of 2019,
we accrued $117 million with respect to prior periods,
assuming retroactive application of the Supreme Court's
ruling. There is significant uncertainty as to how the
liability should be calculated as it is impacted by
multiple variables, including the period of assessment,
the application with respect to certain current and
former employees and whether interest and penalties may
be assessed. Since the ruling, a variety of trade
associations and industry groups have advocated to the
Indian government, highlighting the harm to the
information technology sector, other industries and job
growth in India that would result from a retroactive
application of the ruling. It is possible that the
Indian government will review the matter and there is a
substantial question as to whether the Indian
government will apply the Supreme Court's ruling on a
retroactive basis. As such, the ultimate amount of our
obligation may be materially different from the amount
accrued. The incremental accrual related to the India
Defined Contribution Obligation is reported in
"Selling, general and administrative expenses" in our
unaudited consolidated statement of operations.
(e) Non-operating foreign currency exchange gains and
losses, inclusive of gains and losses on related
foreign exchange forward contracts not designated as
hedging instruments for accounting purposes, are
reported in "Foreign currency exchange gains (losses),
net" in our unaudited consolidated statements of
operations.
(f) Presented below are the tax impacts of each of our non-
GAAP adjustments to pre-tax income:
Three Months Ended March 31
2020 2019
(in millions)
Non-GAAP income tax
benefit (expense) related
to:
Realignment charges $
5
$
2020 Fit For Growth plan
restructuring charges 9
COVID-19 Charges 2
Foreign currency exchange
gains and losses (10) 1
Incremental accrual related
to the India Defined
Contribution Obligation 31
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.
Reconciliations of net cash
(in millions)
March 31, 2020 December 31,
2019
Cash
and
cash
equivalents $
3,886 $
2,645
Short-
term
investments(a) 396 779
Less:
Short-
term
debt 38 38
Long-
term
debt 2,430 700
Net
cash $
1,814 $
2,686
Notes:
---
(a) As of December 31, 2019, $414
million in restricted time
deposits were classified as
short-term investments. As of
March 31, 2020, the restricted
deposits in the amount of $393
million were reclassified to
long-term investments and
therefore are not included in
net cash as of that date.
The above tables serve to reconcile the Non-GAAP
financial measures to the most directly 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
S
chedule of Supplemental Information
(Unaudited)
(dollars in millions)
Three Months Ended March 31, 2020
Year over Year
$ % of total % Change Constant Currency
% Change (a)
---
Revenues by Segment:
Financial Services $
1,451 34.3
% 1.0
% 1.8
%
Healthcare 1,194 28.3
% 2.5
% 2.7
%
Products and Resources 954 22.6
% 4.4
% 5.3
%
Communications, Media and 626 14.8
Technology
% 5.2
% 6.3
%
Total Revenues $
4,225 2.8
% 3.5
%
Revenues by Geography:
North America $
3,190 75.5
% 2.1
% 2.2
%
United Kingdom 337 8.0
% 2.4
% 4.1
%
Continental Europe 437 10.3
% 7.9
% 10.5
%
Europe - Total 774 18.3
% 5.4
% 7.6
%
Rest of World 261 6.2
% 3.2
% 7.6
%
Total Revenues $
4,225 2.8
% 3.5
%
Employee Metrics:
March 31, 2020
March 31, 2019
Number of employees 291,700 285,800
Notes:
---
(a) Constant currency revenue growth
is not a measurement of financial
performance prepared in
accordance with GAAP. See "About
Non-GAAP Financial Measures" for
more information.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Three Months Ended
March 31,
2020 2019
Cash flows from operating activities:
Net income $
367 $
441
Adjustments for non-cash
income and expenses 316 150
Changes in assets and
liabilities (186) (322)
Net cash provided by operating
activities 497 269
Cash flows from investing activities:
Purchases of property and
equipment (112) (106)
Net (purchases) sales of
investments (74) 659
Payments for business
combinations, net of cash
acquired (86) (197)
Net cash (used in) provided by
investing activities (272) 356
Cash flows from financing activities:
Repurchases of common stock (511) (771)
Repayment of term loan
borrowings and finance lease
obligations (13) (2)
Borrowings under the revolving
credit facility 1,740
Dividends paid (121) (116)
Issuance of common stock under
stock-based compensation
plans 40 50
Net cash provided by (used in)
financing activities 1,135 (839)
Effect of exchange rate
changes on cash and cash
equivalents (119) 3
Increase (decrease) in cash
and cash equivalents 1,241 (211)
Cash and cash equivalents,
beginning of period 2,645 1,161
Cash and cash equivalents, end
of period $
3,886 $
950
SUPPLEMENTAL CASH FLOW INFORMATION
(in millions)
Three Months Ended
Stock March
Repurchases 31,
under 2019
Board
of
Directors'
authorized
stock
repurchase
program: March 31, 2020
Number
of
shares
repurchased 8.5 9.5
Remaining
authorized
balance $
1,858
Reconciliation of Free Cash Flow Non-GAAP Financial Measure
(in millions)
Three Months Ended
March 31,
2020 2019
Net
cash
provided
by
operating
activities $
497 $
269
Purchases
of
property
and
equipment (112) (106)
Free
cash
flow $
385 $
163
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SOURCE Cognizant
