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

News provided by

Cognizant Technology Solutions Corporation

Aug 03, 2017, 06:00 ET

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.

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."

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.

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.