Cognizant Technology Solutions Corporation (NASDAQ: CTSH), a leading provider of IT services, today announced its financial results for the three and nine months ended September 30, 2006.
Highlights - Third Quarter 2006 -- Quarterly revenue increased to $377.5 million, up 60% from the year- ago quarter. -- Quarterly diluted EPS on a GAAP basis was $0.40, compared to $0.28 in the year-ago quarter. -- Quarterly diluted EPS on a non-GAAP basis was $0.45, excluding stock- based compensation expense of $0.05.
Revenue for the third quarter of 2006 increased to $377.5 million, up 12% sequentially from $336.8 million in the second quarter of 2006, and up 60% from $235.5 million in the third quarter of 2005. GAAP net income was $61.0 million, or $0.40 per diluted share, compared to $40.6 million, or $0.28 per diluted share, in the third quarter of 2005. Diluted earnings per share on a non-GAAP basis was $0.45. GAAP operating margin for the quarter was 18.2%. Excluding stock based compensation expense of $7.5 million, non-GAAP operating margin was 20.2%, at the high end of the Company's targeted 19-20% range. Reconciliations of these non-GAAP financial measures to GAAP operating results and diluted EPS are included at the end of this release.
Highlights - Nine Months Ended September 30, 2006 -- Revenue increased to $999.8 million, up 59% from the year-ago period. -- Diluted EPS on a GAAP basis was $1.09, compared to $0.74 in the year- ago period. -- Diluted EPS on a non-GAAP basis was $1.22, excluding stock-based compensation expense of $0.13.
Revenue for the nine months ended September 30, 2006 increased to $999.8 million, up 59% from $628.9 million in the same period of 2005. GAAP net income was $163.3 million, or $1.09 per diluted share, compared to $108.6 million, or $0.74 per diluted share, in the same period of 2005. Diluted earnings per share on a non-GAAP basis was $1.22. GAAP operating margin was 18.3%. Excluding stock based compensation expense of $21.8 million, non-GAAP operating margin was 20.4%. Reconciliations of these non-GAAP financial measures to GAAP operating results and diluted EPS are included at the end of this release.
"We are very pleased with our strong financial performance in the third quarter, which further extends our track record of industry-leading growth," said Lakshmi Narayanan, President and CEO of Cognizant. "Our results were driven by our ability to leverage Cognizant's leadership in our core vertical markets and key solution offerings to win new business from both new and existing customers. During the quarter, we experienced strong growth across our industry segments, including strengthening our industry leadership in healthcare, life sciences and financial services. Demand for our broad range of solutions was particularly evident in testing, ERP/CRM, complex systems development, high-end vertical BPO and IT infrastructure management, all areas where we have translated our deep technology and domain expertise into strong market positions over the last several quarters. We also maintained our focus on building the foundation to support the next phase of our growth by investing heavily in our capabilities, people and infrastructure on a global scale."
Narayanan continued, "As we move forward into 2007, we recognize that what distinguishes Cognizant in the market is our unparalleled commitment to partnering with our customers to strengthen their business while providing a tangible return on their IT investments. We are confident that our commitment to generating high levels of customer satisfaction will continue to fuel strong demand for our services and drive our industry-leading growth well into 2007."
2006 Outlook - Fourth Quarter & Full Year
Based on current visibility, the Company is now providing the following guidance:
-- Fourth quarter 2006 revenue anticipated to be at least $405 million, up over 57% compared to the fourth quarter of 2005. -- Fourth quarter 2006 diluted EPS expected to be $0.42 on a GAAP basis, and $0.47 on a non-GAAP basis, which excludes a stock-based compensation expense of $0.05. -- Fiscal 2006 revenue now anticipated to be at least $1.405 billion, up approximately 59% compared to 2005. -- Fiscal 2006 diluted EPS expected to be $1.51 on a GAAP basis. -- Fiscal 2006 diluted EPS expected to be $1.68 on a non-GAAP basis, which excludes a stock-based compensation expense of $0.17. -- Total headcount by end of 2006 expected to be approximately 38,000.
"Cognizant's outstanding growth during the quarter is a testament to the strength of our long-standing reinvestment strategy," said Gordon Coburn, Chief Financial Officer of Cognizant. "During the third quarter, we aggressively invested in building our employee base, with a net addition of approximately 4,700 employees around the world. We also continued to expand our European business, where growth exceeded the Company average for the second consecutive quarter. Furthermore, as we announced this morning, we continue to make significant investments in our global infrastructure and campuses across India to enhance our flexibility to grow the Company as demand for our services continues to escalate. As a result of our strong performance in the first nine months of the year, combined with the overall positive demand environment, we are raising guidance for Fiscal 2006."
Cognizant will host a conference call November 2, at 9:00 a.m. (ET) to discuss the Company's quarterly results. To listen to the call please dial (888) 652-6834 domestically or (706) 679-3288 internationally. The call will also be broadcast live via the Internet at Cognizant's web site, www.cognizant.com. Please go to the web site at least fifteen minutes prior to the call to register, download and install any necessary audio software. A replay will be made available on the web site at www.cognizant.com or by calling (800) 642-1687 for domestic callers and (706) 645-9291 for international callers and entering "8714977" from two hours after the end of the call until 11:59 p.m. (ET) on November 9, 2006.
Cognizant (NASDAQ: CTSH) is a leading provider of IT services. Focused on delivering strategic information technology solutions that address the complex business needs of its clients, Cognizant uses its own on-site/offshore outsourcing model to provide applications management, development, integration, and reengineering; infrastructure management; business process outsourcing; and numerous related services, such as enterprise consulting, technology architecture, program management, and change management.
Cognizant's more than 35,000 employees are committed to partnerships that sustain long-term, proven value for customers by delivering high-quality, cost-effective solutions through its development centers in India and on-site client teams. Cognizant maintains P-CMM and SEI-CMM Level 5 assessments from an independent third-party assessor, was recently named one of Forbes' Best Small Companies in America for the fourth consecutive year, and ranked among the top information technology companies in BusinessWeek's Hot Growth Companies. Cognizant is a member of the NASDAQ-100 Index. Find additional information about Cognizant at http://www.cognizant.com/.
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. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our most recent 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.
About Non-GAAP Financial Measures
To supplement the consolidated financial statements presented in accordance with GAAP, this press release includes 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. 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, the financial statements prepared in accordance with GAAP and reconciliations of Cognizant's GAAP financial statements to such non-GAAP measures should be carefully evaluated.
For its internal management reporting and budgeting purposes, Cognizant's management uses financial statements that do not include stock-based compensation expense related to employee stock options and employee stock purchases for financial and operational decision making, to evaluate period- to-period comparisons and for making comparisons of Cognizant's operating results to that of its competitors. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use when adopting FAS 123R, Cognizant's management believes that providing a non-GAAP financial measure that excludes stock-based compensation allows investors to make additional comparisons between Cognizant's operating results to those of other companies. Accordingly, Cognizant believes that the presentation of non-GAAP operating margin and non- GAAP diluted earnings per share, when read in conjunction with the company's reported results, can provide useful supplemental information to investors and management regarding financial and business trends relating to its financial condition and results of operations.
A limitation of using non-GAAP operating margin and non-GAAP diluted earnings per share versus operating margin and diluted earnings per share calculated in accordance with GAAP is that non-GAAP operating margin and non- GAAP diluted earnings per share exclude costs, namely, stock-based compensation, that are recurring. Stock-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in Cognizant's business. Management compensates for this limitation by providing specific information regarding the GAAP amounts excluded from non-GAAP operating margin and non-GAAP diluted earnings per share and evaluating such non-GAAP financial measures with financial measures calculated in accordance with GAAP.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2006 2005 2006 2005 Revenues $377,522 $235,536 $999,837 $628,928 Cost of revenues (exclusive of depreciation and amortization shown separately below) 208,427 128,175 555,335 343,937 Selling, general and administrative expenses 91,470 54,759 238,219 142,295 Depreciation and amortization expense 8,861 5,581 23,692 16,120 Income from operations 68,764 47,021 182,591 126,576 Other income (expense): Interest income 4,787 2,221 12,077 6,122 Other income / (expense), net (611) 130 856 (589) Total other income / (expense) 4,176 2,351 12,933 5,533 Income before provision for income taxes 72,940 49,372 195,524 132,109 Provision for income taxes 11,913 8,789 32,262 23,516 Net income $61,027 $40,583 $163,262 $108,593 Basic earnings per share $0.43 $0.30 $1.16 $0.80 Diluted earnings per share $0.40 $0.28 $1.09 $0.74 Weighted average number of common shares outstanding 141,202 137,186 140,470 135,786 Weighted average number of common and dilutive shares outstanding 150,836 147,281 150,228 146,552 COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures (In thousands, except per share data) Three Months Ended September 30, 2006 2006 2006 GAAP Adjustments Non-GAAP Income from operations $68,764 $7,470(a) $76,234 Operating margin 18.2% 2.0%(a) 20.2% Diluted earnings per share $0.40 $0.05(b) $0.45 Nine Months Ended September 30, 2006 2006 2006 GAAP Adjustments Non-GAAP Income from operations $182,591 $21,841(c) $204,432 Operating margin 18.3% 2.1%(c) 20.4% Diluted earnings per share $1.09 $0.13(d) $1.22 Notes: (a) Adjustment to exclude stock-based compensation of $7,470 from income from operations of which $3,441 was reported in cost of revenues and $4,029 was reported in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations. (b) Adjustment to exclude the per share effect of stock-based compensation expense net of the related tax benefit of $541. (c) Adjustment to exclude stock-based compensation of $21,841 from income from operations of which $9,920 was reported in cost of revenues and $11,921 was reported in selling, general and administrative expenses in our unaudited condensed consolidated statement of operations. (d) Adjustment to exclude the per share effect of stock-based compensation expense net of the related tax benefit of $2,516. COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) (In thousands) September 30, December 31, 2006 2005 Assets Current Assets Cash and cash equivalents $197,700 $196,938 Short-term investments 337,898 227,063 Trade accounts receivable, net of allowances of $3,472 and $2,325, respectively 253,933 153,971 Unbilled accounts receivable 42,789 22,725 Deferred income tax assets, net 58,542 42,752 Other current assets 30,355 19,974 Total Current Assets 921,217 663,423 Property and equipment, net 198,108 146,982 Goodwill 26,775 18,223 Other Intangible assets, net 21,467 16,277 Deferred income tax assets, net 1,451 17,247 Other assets 13,494 7,741 Total Assets $1,182,512 $869,893 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $27,648 $16,420 Accrued expenses and other liabilities 185,633 137,375 Total Current Liabilities 213,281 153,795 Other noncurrent liabilities 2,673 1,953 Total Liabilities 215,954 155,748 Stockholders' Equity 966,558 714,145 Total Liabilities and Stockholders' Equity $1,182,512 $869,893
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