COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION Executive Summary
Cognizant is one of the world's leading professional services companies, engineering modern business for the digital era. Our services include digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services. Digital services are an important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses. We are continuing to invest in digital services with a focus on four key areas: IoT, digital engineering, data and cloud. We tailor our services and solutions to specific industries with an integrated global delivery model that employs client service and delivery teams based at client locations and dedicated global and regional delivery centers. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world. OnJuly 6, 2022 , we announced that we will be simplifying our internal operating structure around practice areas and delivery operations by merging our Digital Business & Technology and Digital Business Operations practice areas with their respective delivery organizations to create four new integrated practices: Software & Platform Engineering, Core Technologies & Insights, Enterprise Platform Services, and Intuitive Operations & Automation. This change will not impact our reportable business segments. Q2 2022 Financial Results Revenue Income from Operations Operating Margin Diluted EPS GAAP Adjusted1 [[Image Removed: ctsh-20220630_g2.jpg]] [[Image Removed: ctsh-20220630_g3.jpg]] [[Image Removed: ctsh-20220630_g4.jpg]] [[Image Removed: ctsh-20220630_g5.jpg]] Revenue up$321 million Income from Operations up$64 Operating margin up 30 GAAP Adjusted1 or 7.0% from Q2 2021; million or 9.2% from Q2 2021 bps from Q2 2021 Diluted EPS up Diluted EPS up 9.5% in constant$0.14 or 14.4%$0.15 or 15.2% currency1 from Q2 2021 from Q2 2021 During the quarter endedJune 30, 2022 , revenues increased by$321 million as compared to the quarter endedJune 30, 2021 , representing growth of 7.0%, or 9.5% on a constant currency basis1. Our recently completed acquisitions contributed 110 basis points to revenue growth. Revenue growth also reflected our clients' continued adoption and integration of digital technologies. Revenues in the Communications, Media and Technology segment benefited from our technology clients' growing demand for services related to digital content. Products and Resources revenue growth was driven by increasing client interest in delivering cloud-based, data-driven enhanced customer experiences, the automotive industry's shift toward electric and connected vehicles, and client investment in supply chain modernization and smart factory solutions. Revenue growth in the Health Sciences (previously referred to as Healthcare) segment was driven by increased demand for digital services among pharmaceutical companies. Financial services revenue growth reflects the growing demand for digital services, partially offset by the negative impact of the previously disclosed sale of the Samlink subsidiary, which was completed onFebruary 1, 2022 . We continue to experience pricing pressure on our non-digital services as our clients optimize the cost of supporting their legacy systems and operations. 1 Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable. Cognizant Technology Solutions 22 June 30, 2022 Form 10-Q
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Table of Content s
Operating margin increased to 15.5% for the quarter endedJune 30, 2022 , from 15.2% for the quarter endedJune 30, 2021 . Our 2022 operating margin was positively impacted by delivery efficiencies, economies of scale that allowed us to leverage our cost structure over a larger organization and the depreciation of the Indian rupee against theU.S. dollar, partially offset by increased compensation costs for our delivery personnel (including employees and subcontractors).
Business Outlook
As we seek to increase our commercial momentum and accelerate growth, our four strategic priorities are:
•Accelerating digital - growing our digital business organically and inorganically;
•Globalizing Cognizant - accelerating the growth of our business in key international markets and diversifying our leadership, capabilities and delivery footprint;
•Increasing our relevance to our clients - ensuring industry-aligned thought leadership and capabilities to address clients' business needs; and
•Repositioning our brand - improving our global brand recognition and becoming better known as a global digital partner to the entire C-suite.
We continue to expect the long-term focus of our clients to be on their digital transformation into software-driven, data-enabled, customer-centric and differentiated businesses. The COVID-19 pandemic accelerated our clients' need to modernize their business, which has led to increased demand for digital capabilities. As our clients seek to optimize the cost of supporting their legacy systems and operations, our non-digital services have been, and may continue to be, subject to pricing pressure. In addition, clients will likely continue to contend with industry-specific changes driven by evolving digital technologies, uncertainty in the regulatory environment, industry consolidation and convergence as well as international trade policies and other macroeconomic factors, which could affect their demand for our services. As a global professional services company, we compete on the basis of the knowledge, experience, insights, skills and talent of our employees and the value they can provide to our clients. Our success is dependent, in large part, on our ability to keep our supply of skilled employees, in particular those with experience in key digital areas, in balance with client demand. Competition for skilled employees in the current labor market is intense, and we continue to experience significantly elevated voluntary attrition. For the three months endedJune 30, 2022 , our annualized attrition, including both voluntary and involuntary, was 35.6% as compared to 31.4% for the three months endedJune 30, 2021 . Challenges attracting and retaining highly qualified personnel have resulted in increased cost of delivery and have negatively impacted our ability to satisfy client demand and achieve our full revenue potential. We expect these impacts to continue for at least the remainder of 2022. Further, our ongoing and anticipated future efforts with respect to recruitment, talent management and employee engagement may not be successful and are likely to continue to result in increased compensation costs. While we strive to adjust pricing to reduce the impact of compensation increases on our operating margin, we may not be successful in fully recovering these increases, which could adversely affect our profitability. The invasion ofUkraine byRussia and the sanctions and other measures being imposed in response to this conflict have increased the level of economic and political uncertainty worldwide. We do not have employees, facilities or significant operations in eitherRussia orUkraine and revenues generated from clients in both countries were immaterial in both 2021 and the first half of 2022. However, the continuation of the hostilities or the expansion of the current conflict's scope into surrounding geographic areas could directly impact us, our clients, vendors or subcontractors, which could impact our operations and financial performance. We continue to monitor the situation closely to ensure business continuity plans are in place for neighboring countries where we have a presence.
Our future results may be affected by potential tax law changes and other
potential regulatory changes, including possible
Cognizant Technology Solutions 23 June 30, 2022 Form 10-Q
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Table of Content s Results of Operations
Three Months Ended
The following table sets forth, for the periods indicated, certain financial
data for the three months ended
% of % of Increase
(Dollars in millions, except per share
data) 2022 Revenues 2021 Revenues $ %
Revenues $ 4,906 100.0 $ 4,585 100.0 $ 321 7.0
Cost of revenues(a) 3,119 63.6 2,863 62.4 256 8.9
Selling, general and administrative
expenses(a) 883 18.0 881 19.2 2 0.2
Depreciation and amortization expense 144 2.9 145 3.2 (1) (0.7) Income from operations 760 15.5 696 15.2 64 9.2 Other income (expense), net 1 (2) 3
*
Income before provision for income taxes 761 15.5 694 15.1 67
9.7
Provision for income taxes (184) (184) -
-
Income (loss) from equity method investments - 2 (2) (100.0) Net income$ 577 11.8$ 512 11.2$ 65 12.7 Diluted earnings per share$ 1.11 $ 0.97 $ 0.14 14.4 Other Financial Information2 Adjusted Diluted EPS$ 1.14 $ 0.99 $ 0.15 15.2
(a)Exclusive of depreciation and amortization expense
*Not meaningful Revenues - Overall During the quarter endedJune 30, 2022 , revenues increased by$321 million as compared to the quarter endedJune 30, 2021 , representing growth of 7.0%, or 9.5% on a constant currency basis2. Our recently completed acquisitions contributed 110 basis points to revenue growth. Revenue growth also reflected our clients' continued adoption and integration of digital technologies. We continue to experience pricing pressure on non-digital services as clients optimize the cost of supporting their legacy systems and operations. Revenues from clients added sinceJune 30, 2021 , including those related to acquisitions, were$107 million . 2 Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures, as applicable. Cognizant Technology Solutions 24 June 30, 2022 Form 10-Q
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Table of Content s
Revenues - Reportable Business Segments
The following charts set forth revenues and change in revenues by business
segment and geography for the three months ended
Financial Services Health Sciences
Increase / (Decrease) Increase / (Decrease)
Dollars in millions Revenues $ % CC 3 Revenues $ % CC %3
North America $ 1,104 55 5.2 5.5 $ 1,210 79 7.0 7.0
United Kingdom 147 17 13.1 22.3 44 (1) (2.2) 6.1
Continental Europe 143 (43) (23.1) (15.1) 126 6 5.0 14.6
Europe - Total 290 (26) (8.2) 0.3 170 5 3.0 12.3
Rest of World 148 11 8.0 13.5 28 (1) (3.4) 4.8
Total $ 1,542 40 2.7 5.1 $ 1,408 83 6.3 7.6
Products and Resources Communications, Media and Technology
Increase / (Decrease) Increase / (Decrease)
Dollars in millions Revenues $ % CC %3 Revenues $ % CC %3
North America $ 770 47 6.5 6.8 $ 572 103 22.0 22.1
United Kingdom 134 18 15.5 28.0 133 21 18.8 31.4
Continental Europe 143 11 8.3 21.7 33 (11) (25.0) (14.0)
Europe - Total 277 29 11.7 24.6 166 10 6.4 18.6
Rest of World 93 9 10.7 14.5 78 - - 6.0
Total $ 1,140 85 8.1 11.6 $ 816 113 16.1 19.5
Financial Services - revenues increased 2.7%, or 5.1% on a constant currency basis3
[[Image Removed: ctsh-20220630_g6.jpg]]
Banking é $8M
Insurance é $32M
Revenue growth reflects the growing demand for digital services among U.S.
regional banks, public sector clients in the United Kingdom and insurance
companies. The previously disclosed sale of the Samlink subsidiary, which was
completed on February 1, 2022 , negatively impacted revenue growth in this
segment by 190 basis points. Revenues from clients added since June 30, 2021
were $22 million .3
Health Sciences - revenues increased 6.3%, or 7.6% on a constant currency basis3
Effective in the second quarter of 2022, we combined the healthcare operating segment with the life sciences operating segment and renamed our Healthcare reportable segment as Health Sciences. See Note 11 to our unaudited consolidated financial statements for additional information.
Revenue growth was driven by increased demand for digital services among
pharmaceutical companies. Revenues from clients added since
[[Image Removed: ctsh-20220630_g7.jpg]]
é $83M
3 Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
Cognizant Technology Solutions 25 June 30, 2022 Form 10-Q
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Table of Content s
Products and Resources - revenues increased 8.1%, or 11.6% on a constant currency
basis4
[[Image Removed: ctsh-20220630_g8.jpg]]
Manufacturing, Logistics, Energy and Utilities é $40M
Retail and Consumer Goods é $30M
Travel and Hospitality é $15M
Revenue growth in this segment was primarily driven by increased client interest
in delivering cloud-based, data-driven enhanced customer experiences, the
automotive industry's shift toward electric and connected vehicles, and client
investment in supply chain modernization and smart factory solutions. Revenue
growth in this segment included approximately 260 basis points related to
recently completed acquisitions. Revenues from clients added since June 30, 2021
were $36 million .4
Communications, Media and Technology - revenues increased 16.1%, or 19.5% on a constant currency basis4
In 2022, we combined the communications and media operating segment with the technology operating segment. See Note 11 to our unaudited consolidated financial statements for additional information.
Revenues in this segment reflected growing demand from our technology clients for services related to digital content, primarily driven by the largest clients in this segment, as well as demand for personalized user experiences and data modernization. Revenues from clients added sinceJune 30, 2021 were$38 million . [[Image Removed: ctsh-20220630_g9.jpg]] é$113M
Revenues - Geographic Markets
Revenues of
[[Image Removed: ctsh-20220630_g10.jpg]]
Q2 2022 as compared to Q2 2021 Increase
(Dollars in millions) $ % CC %4
North America $ 284 8.4 8.6
United Kingdom 55 13.6 24.7
Continental Europe (37) (7.7) 2.5
Europe - Total 18 2.0 12.6
Rest of World 19 5.8 11.2
Total revenues $ 321 7.0 9.5
North America continues to be our largest market, representing 74.5% of total
revenues. Outside of the North America region, revenues were negatively impacted
by foreign currency exchange rate movements. Revenue growth in the United
Kingdom was strong among Financial Services clients, including certain public
sector clients, Products and Resources clients, and Communications, Media and
Technology clients. Revenue decline in the Continental Europe region includes a
negative 600 basis points impact from the previously disclosed sale of the
Samlink subsidiary, which was completed on February 1, 2022 , and was partially
offset by growth in the German market, which benefited from recent acquisitions.
Cost of Revenues (Exclusive of Depreciation and Amortization Expense)
[[Image Removed: ctsh-20220630_g11.jpg]]
é $256M
é 1.2% as a % of revenues
¡ % of Revenues
Our cost of revenues consists primarily of salaries, incentive-based
compensation, stock-based compensation expense, employee benefits,
project-related immigration and travel for technical personnel, subcontracting
and equipment costs relating to revenues. The increase, as a percentage of
revenues, was due to higher compensation costs for delivery personnel (including
employees and subcontractors), partially offset by delivery efficiencies and the
depreciation of the Indian rupee against the U.S. dollar. Challenges attracting
and retaining highly qualified personnel have resulted and are likely to
continue to result in higher compensation costs.
4 Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
Cognizant Technology Solutions 26 June 30, 2022 Form 10-Q
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Table of Content s
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation,
stock-based compensation expense, employee benefits, immigration, travel,
marketing, communications, management, finance, administrative and occupancy
costs. The decrease, as a percentage of revenues, was primarily due to economies
of scale that allowed us to leverage our cost structure over a larger
organization, the beneficial impact of foreign currency exchange rate movements
and the optimization of non-strategic SG&A expenses.
[[Image Removed: ctsh-20220630_g12.jpg]]
é $2M
ê 1.2% as a % of revenues
¡ % of Revenues
Depreciation and Amortization Expense
Depreciation and amortization expense decreased by 0.7%, or 0.3% as a percentage
of revenues, during the second quarter of 2022 as compared to the second quarter
of 2021.
Operating Margin - Overall
[[Image Removed: ctsh-20220630_g13.jpg]]
é $64M
é 0.3% as a % of revenues
¡ % of Revenues
The 2022 operating margin was positively impacted by delivery efficiencies,
economies of scale that allowed us to leverage our cost structure over a larger
organization and the depreciation of the Indian rupee against the U.S. dollar
partially offset by increased compensation costs for our delivery personnel
(including employees and subcontractors).
Excluding the impact of applicable designated cash flow hedges, the depreciation
of the Indian rupee against the U.S. dollar positively impacted our operating
margin by approximately 80 basis points during the three months ended June 30,
2022 . Each additional 1.0% change in exchange rate between the Indian rupee and
the U.S. dollar will have the effect of moving our operating margin by 18 basis
points.
We enter into foreign exchange derivative contracts to hedge certain Indian
rupee denominated payments in India . These hedges are intended to mitigate the
volatility of the changes in the exchange rate between the U.S. dollar and the
Indian rupee. The settlement of our cash flow hedges positively impacted our
operating margin by 12 basis points during the three months ended June 30, 2022
and by 31 basis points during the three months ended June 30, 2021 .
We finished the second quarter of 2022 with approximately 341,300 employees.
Annualized attrition, including both voluntary and involuntary, was
approximately 35.6% for the three months ended June 30, 2022 . In both 2021 and
2022, voluntary attrition constituted the vast majority of attrition for the
period. Attrition in all periods presented is weighted towards our more junior
employees.
[[Image Removed: ctsh-20220630_g14.jpg]]
¡ Annualized attrition
Segment Operating Profit
In 2022, we made certain changes to the internal measurement of segment
operating profits for the purpose of evaluating segment performance and resource
allocation. The primary reason for the change was to charge to the business
segments costs that are directly managed and controlled by them. Specifically,
segment operating profit now includes costs related to non-delivery personnel
that support consulting services, which were previously included in "unallocated
costs." We have reported 2022 segment operating profits using the new allocation
methodology and have recast the 2021 results to conform to the new methodology.
Cognizant Technology Solutions 27 June 30, 2022 Form 10-Q
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Table of Content s
Segment operating profit and operating margin percentage were as follows:
[[Image Removed: ctsh-20220630_g15.jpg]]
[[Image Removed: ctsh-20220630_g16.jpg]]
[[Image Removed: ctsh-20220630_g17.jpg]]
[[Image Removed: ctsh-20220630_g18.jpg]]
In 2022, segment operating margins benefited from delivery efficiencies and the
depreciation of the Indian rupee against the U.S. dollar partially offset by
increased compensation costs for delivery personnel (including employees and
subcontractors). The 2022 Health Sciences segment operating margin was
additionally negatively affected by investments to support revenue growth and
elevated pricing pressure on non-digital services.
Total segment operating profit and operating margin were as follows for the
three months ended June 30 :
Increase /
(Dollars in millions) 2022 % of Revenues 2021 % of Revenues (Decrease)
Total segment operating profit $ 1,472 30.0 $ 1,366 29.8 $ 106
Less: unallocated costs 712 670 42
Income from operations $ 760 15.5 $ 696 15.2 $ 64
Other Income (Expense), Net
The following table sets forth total other income (expense), net for the three
months ended June 30 :
Increase/
(in millions) 2022 2021 Decrease
Foreign currency exchange (losses) $ (36) $ (10) $ (26)
Gains on foreign exchange forward contracts not
designated as hedging instruments 32 3 29
Foreign currency exchange gains (losses), net (4) (7) 3
Interest income 9 7 2
Interest expense (3) (2) (1)
Other, net (1) - (1)
Total other income (expense), net $ 1 The foreign currency exchange losses were attributed to the remeasurement of net monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries. The gains on foreign exchange forward contracts not designated as hedging instruments related to the realized and unrealized gains and losses on contracts entered into to offset our foreign currency exposures. As ofJune 30, 2022 , the notional value of our undesignated hedges was$1,072 million . Provision for Income Taxes [[Image Removed: ctsh-20220630_g19.jpg]] ¡ Effective Income Tax Rate ê 2.3% The effective income tax rate decreased as a result of higher discrete income tax benefits, primarily related to our undistributed foreign earnings, in the second quarter of 2022 as compared to the second quarter of 2021. Net Income
The increase in net income was driven by higher income from operations and a lower effective income tax rate.
[[Image Removed: ctsh-20220630_g20.jpg]] é$65M ¡ é 0.6% of Revenues Cognizant Technology Solutions 28 June 30, 2022 Form 10-Q
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Table of Content s Non-GAAP Financial Measures Portions of our disclosure include non-GAAP financial measures. 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 non-GAAP financial measures to the corresponding GAAP measures, set forth below, should be carefully evaluated. Adjusted Diluted EPS excludes unusual items, 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. 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. We believe providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For 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 executive officers and for making comparisons of our operating results to those of our competitors. We believe that the presentation of non-GAAP financial measures, which exclude certain costs, along with reconciliations to the most comparable GAAP measure, as applicable, 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 may exclude costs that are recurring such as 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 financial measures to allow investors to evaluate such non-GAAP financial measures.
The following table presents a reconciliation of each non-GAAP financial measure
to the most comparable GAAP measure for the three months ended
2022 2021
GAAP diluted EPS $ 1.11 $ 0.97 Non-operating foreign currency exchange (gains) losses, pre-tax (1) 0.01
0.01
Tax effect of non-operating foreign currency exchange (gains) losses
(2) 0.02 0.01
Adjusted Diluted EPS $ 1.14 $ 0.99
(1)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.
(2)Presented below are the tax impacts of each of our non-GAAP adjustments to
pre-tax income:
Three Months Ended
June 30,
(in millions) 2022 2021Non-GAAP income tax (expense) related to:
Foreign currency exchange gains and losses $ (14)
The effective tax rate related to non-operating foreign currency exchange gains
and losses varies depending on the jurisdictions in which such income and
expenses are generated and the statutory rates applicable in those
jurisdictions. As such, the income tax effect of non-operating foreign currency
exchange gains and losses shown in the above table may not appear proportionate
to the net pre-tax foreign currency exchange gains and losses reported in our
unaudited consolidated statements of operations.
Cognizant Technology Solutions 29 June 30, 2022 Form 10-Q
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Table of Content s Six Months EndedJune 30, 2022 Compared to Six Months EndedJune 30, 2021
The following table sets forth, for the periods indicated, certain financial
data for the six months ended
% of % of Increase / Decrease
(Dollars in millions, except per share data) 2022 Revenues 2021 Revenues $ %
Revenues $ 9,732 100.0 $ 8,986 100.0 $ 746 8.3
Cost of revenues(a) 6,216 63.9 5,627 62.6 589 10.5
Selling, general and administrative
expenses(a) 1,745 17.9 1,708 19.0 37 2.2
Depreciation and amortization expense 287 2.9 286 3.2 1 0.3
Income from operations 1,484 15.2 1,365 15.2 119 8.7
Other income (expense), net 6 (6) 12 *
Income before provision for income taxes 1,490 15.3 1,359 15.1 131 9.6
Provision for income taxes (354) (344) (10) 2.9
Income (loss) from equity method investments 4 2 2 100.0
Net income $ 1,140 11.7 $ 1,017 11.3 $ 123 12.1
Diluted EPS $ 2.18 $ 1.92 $ 0.26 13.5
Other Financial Information5
Adjusted Diluted EPS $ 2.23 $ 1.96 $ 0.27 13.8
(a)Exclusive of depreciation and amortization expense.
*Not meaningful Revenues - Overall During the six months endedJune 30, 2022 , revenues increased by$746 million as compared to the six months endedJune 30, 2021 , representing growth of 8.3%, or 10.2% on a constant currency basis5. Our recently completed acquisitions contributed 160 basis points to revenue growth. Revenue growth also reflected our clients' continued adoption and integration of digital technologies. We continue to experience pricing pressure on non-digital services as clients optimize the cost of supporting their legacy systems and operations. In addition, our revenues from clients added sinceJune 30, 2021 , including those related to acquisitions, were$179 million . 5 Adjusted Diluted EPS and constant currency revenue growth are not measures of financial performance prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more information and reconciliations to the most directly comparable GAAP financial measures. Cognizant Technology Solutions 30 June 30, 2022 Form 10-Q
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Table of Content s
Revenues - Reportable Business Segments
The following charts set forth revenues and change in revenues by business
segment and geography for the six months ended
Financial Services Health Sciences
Increase / (Decrease) Increase / (Decrease)
Dollars in millions Revenues $ % CC %6 Revenues $ % CC %6
North America $ 2,184 122 5.9 6.0 $ 2,405 173 7.8 7.8
United Kingdom 298 43 16.9 22.9 88 3 3.5 9.8
Continental Europe 300 (78) (20.6) (14.2) 246 8 3.4 10.8
Europe - Total 598 (35) (5.5) 0.7 334 11 3.4 10.6
Rest of World 288 23 8.7 13.4 61 3 5.2 11.5
Total $ 3,070 110 3.7 5.5 $ 2,800 187 7.2 8.2
Products and Resources Communications, Media and Technology
Increase / (Decrease) Increase / (Decrease)
Dollars in millions Revenues $ % CC %6 Revenues $ % CC %6
North America $ 1,531 90 6.2 6.4 $ 1,105 185 20.1 20.2
United Kingdom 266 44 19.8 28.1 259 48 22.7 32.2
Continental Europe 288 53 22.6 34.2 70 (17) (19.5) (10.8)
Europe - Total 554 97 21.2 31.2 329 31 10.4 19.7
Rest of World 185 30 19.4 22.8 158 16 11.3 16.7
Total $ 2,270 217 10.6 13.2 $ 1,592 232 17.1 19.7
Financial Services - revenues increased 3.7%, or 5.5% on a constant currency basis6
[[Image Removed: ctsh-20220630_g21.jpg]]
Banking é $27M
Insurance é $83M
Revenue growth reflects the growing demand for digital services among U.S.
regional banks, public sector clients in the United Kingdom and insurance
companies. The previously disclosed sale of the Samlink subsidiary, which was
completed on February 1, 2022 , negatively impacted revenue growth in this
segment by 160 basis points.6Revenues from clients added since June 30, 2021
were $39 million .
Health Sciences - revenues increased 7.2%, or 8.2% on a constant currency basis6
Effective in the second quarter of 2022, we combined the healthcare operating segment with the life sciences operating segment and renamed our Healthcare reportable segment to Health Sciences. See Note 11 to our unaudited consolidated financial statements for additional information.
Revenue growth was driven by increased demand for digital services among
pharmaceutical companies. Revenues from clients added since
[[Image Removed: ctsh-20220630_g22.jpg]]
é $187M
6 Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
Cognizant Technology Solutions 31 June 30, 2022 Form 10-Q
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Table of Content s
Products and Resources - revenues increased 10.6%, or 13.2% on a constant currency
basis7
[[Image Removed: ctsh-20220630_g23.jpg]]
Manufacturing, Logistics, Energy and Utilities é $113M
Retail and Consumer Goods é $72M
Travel and Hospitality é $32M
Revenue growth in this segment was primarily driven by increased client interest
in delivering cloud-based, data-driven enhanced customer experiences, the
automotive industry's shift toward electric and connected vehicles, and client
investment in supply chain modernization and smart factory solutions. Revenue
growth in this segment included approximately 370 basis points related to
recently completed acquisitions. Revenues from clients added since June 30, 2021
were $57 million .7
Communications, Media and Technology - revenues increased 17.1%, or 19.7% on a constant
currency basis7
In 2022, we combined the communications and media operating segment with the technology operating segment. See Note 11 to our unaudited consolidated financial statements for additional information.
Revenues in this segment reflected growing demand from our technology clients for services related to digital content, primarily driven by the largest clients in this segment, as well as demand for personalized user experiences and data modernization. Revenues from clients added sinceJune 30, 2021 were$64 million . [[Image Removed: ctsh-20220630_g24.jpg]] é$232M
Revenues - Geographic Markets
Revenues of
[[Image Removed: ctsh-20220630_g25.jpg]]
YTD 2022 as compared to YTD 2021 Increase / (Decrease)
(Dollars in millions) $ % CC %7
North America $ 570 8.6 8.7
United Kingdom 138 17.9 25.5
Continental Europe (34) (3.6) 4.6
Europe - Total 104 6.1 14.0
Rest of World 72 11.6 16.3
Total revenues $ 746 8.3 10.2
North America continues to be our largest market, representing 74.2% of total
revenues for the six months ended June 30, 2022 . Outside of our North America
region, revenues were negatively impacted by foreign currency exchange rate
movements. Revenue growth in the United Kingdom was strong among Financial
Services clients, including certain public sector clients, Products and
Resources clients, and Communications, Media and Technology clients. Revenue
decline in the Continental Europe region includes a negative 510 basis points
impact from the previously disclosed sale of the Samlink subsidiary, which was
completed on February 1, 2022 , and was partially offset by growth in the German
market, which benefited from recent acquisitions. Revenue growth in the Rest of
World region was primarily driven by the Australian market, which benefited from
an acquisition that closed in the first half of 2021.
7 Constant currency revenue growth is not a measure of financial performance
prepared in accordance with GAAP. See "Non-GAAP Financial Measures" for more
information.
Cognizant Technology Solutions 32 June 30, 2022 Form 10-Q
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Cost of Revenues (Exclusive of Depreciation and Amortization Expense)
[[Image Removed: ctsh-20220630_g26.jpg]]
é $589M
é 1.3% as a % of revenues
¡ % of Revenues
Our cost of revenues consists primarily of salaries, incentive-based
compensation, stock-based compensation expense, employee benefits,
project-related immigration and travel for technical personnel, subcontracting
and equipment costs relating to revenues. The increase, as a percentage of
revenues, was due to higher compensation costs for delivery personnel (including
employees and subcontractors), partially offset by delivery efficiencies and the
depreciation of the Indian rupee against the U.S. dollar. Challenges attracting
and retaining highly qualified personnel have resulted and are likely to
continue to result in higher compensation costs.
SG&A Expenses (Exclusive of Depreciation and Amortization Expense)
SG&A expenses consist primarily of salaries, incentive-based compensation,
stock-based compensation expense, employee benefits, immigration, travel,
marketing, communications, management, finance, administrative and occupancy
costs. The decrease, as a percentage of revenues, was primarily due to economies
of scale that allowed us to leverage our cost structure over a larger
organization and the optimization of non-strategic SG&A expenses.
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é $37M
ê 1.1% as a % of revenues
¡ % of Revenues
Depreciation and Amortization Expense
Depreciation and amortization expense increased 0.3%, or decreased 0.3% as a percentage of revenues, during the six months endedJune 30, 2022 as compared to the 2021 period. Operating Margin - Overall [[Image Removed: ctsh-20220630_g28.jpg]] é$119 million Flat as a % of revenue ¡ % of Revenues The 2022 operating margin was positively impacted by delivery efficiencies, economies of scale that allowed us to leverage our cost structure over a larger organization and the depreciation of the Indian rupee against theU.S. dollar, offset by increased compensation costs for our delivery personnel (including employees and subcontractors). Excluding the impact of applicable designated cash flow hedges, the depreciation of the Indian rupee against theU.S. dollar positively impacted our operating margin by approximately 70 basis points during the six months endedJune 30, 2022 . Each additional 1.0% change in exchange rate between the Indian rupee and theU.S. dollar will have the effect of moving our operating margin by approximately 18 basis points. We enter into foreign exchange derivative contracts to hedge certain Indian rupee denominated payments inIndia . These hedges are intended to mitigate the volatility of the changes in the exchange rate between theU.S. dollar and the Indian rupee. The settlement of our cash flow hedges positively impacted our operating margin by 20 basis points during the six months endedJune 30, 2022 and by 39 basis points during the 2021 period. Cognizant Technology Solutions 33 June 30, 2022 Form 10-Q
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Segment Operating Profit
In 2022, we made certain changes to the internal measurement of segment
operating profits for the purpose of evaluating segment performance and resource
allocation. The primary reason for the change was to charge to the business
segments costs that are directly managed and controlled by them. Specifically,
segment operating profit now includes costs related to non-delivery personnel
that support consulting services, which were previously included in "unallocated
costs." We have reported 2022 segment operating profits using the new allocation
methodology and have recast the 2021 results to conform to the new methodology.
Segment operating profit and operating margin percentage were as follows:
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[[Image Removed: ctsh-20220630_g30.jpg]]
[[Image Removed: ctsh-20220630_g31.jpg]]
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In 2022, segment operating margins were negatively impacted by increased
compensation costs for delivery personnel (including employees and
subcontractors), partially offset by delivery efficiencies and the depreciation
of the Indian rupee against the U.S. dollar. The 2022 Financial Services segment
operating margin reflects the gain on sale of the Samlink subsidiary while the
2022 Health Sciences segment operating margin was negatively affected by
investments to support revenue growth and elevated pricing pressure on
non-digital services.
Total segment operating profit and margin were as follows for the six months
ended June 30 :
Increase /
(Dollars in millions) 2022 % of Revenues 2021 % of Revenues (Decrease)
Total segment operating profit $ 2,838 29.2 $ 2,683 29.9 $ 155
Less: unallocated costs 1,354 1,318 36
Income from operations $ 1,484 15.2 $ 1,365 15.2 $ 119
Other Income (Expense), Net
The following table sets forth total other income (expense), net for the six
months ended June 30 :
Increase/
(in millions) 2022 2021 Decrease
Foreign currency exchange (losses) $ (49) $ (22) $ (27)
Gains on foreign exchange forward contracts not
designated as hedging instruments 45 6 39
Foreign currency exchange gains (losses), net (4) (16) 12
Interest income 15 16 (1)
Interest expense (5) (4) (1)
Other, net - (2) 2
Total other income (expense), net $ 6
The foreign currency exchange losses were attributed to the remeasurement of net
monetary assets and liabilities denominated in currencies other than the
functional currencies of our subsidiaries. The gains on foreign exchange forward
contracts not designated as hedging instruments related to the realized and
unrealized gains and losses on contracts entered into to offset our foreign
currency exposures.
Cognizant Technology Solutions 34 June 30, 2022 Form 10-Q
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Provision for Income Taxes
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é $10M
¡ Effective Income Tax Rate ê 1.5%
The effective income tax rate decreased as a result of higher discrete tax
benefits, primarily related to our undistributed foreign earnings, in the six
months ended
The increase in net income was driven by higher income from operations and a lower effective income tax rate.
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é $123M
¡ é 0.4% of Revenues
Non-GAAP Financial Measures
See "Three Months EndedJune 30, 2022 Compared to Three Months EndedJune 30, 2021 - Non-GAAP Financial Measures" above for additional information about our use of non-GAAP financial measures.
The following table presents a reconciliation of each non-GAAP financial measure
to the most comparable GAAP measure for the six months ended
2022 2021 GAAP diluted EPS$ 2.18 $ 1.92
Non-operating foreign currency exchange (gains) losses, pre-tax (1) 0.01
0.03
Tax effect of non-operating foreign currency exchange (gains) losses
(2) 0.04 0.01
Adjusted Diluted EPS $ 2.23 $ 1.96
(1)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.
(2)Presented below are the tax impacts of each of our non-GAAP adjustments to
pre-tax income:
Six Months Ended
(in millions) June 30,
2022 2021
Non-GAAP income tax benefit (expense) related to:
Foreign currency exchange gains and losses (20) (6)
The effective tax rate related to non-operating foreign currency exchange gains
and losses varies depending on the jurisdictions in which such income and
expenses are generated and the statutory rates applicable in those
jurisdictions. As such, the income tax effect of non-operating foreign currency
exchange gains and losses shown in the above table may not appear proportionate
to the net pre-tax foreign currency exchange gains and losses reported in our
unaudited consolidated statements of operations.
Cognizant Technology Solutions 35 June 30, 2022 Form 10-Q
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Table of Content s Liquidity and Capital Resources
Our cash generated from operations has historically been the primary source of
liquidity to fund operations and investments to grow our business. As of
The following table provides a summary of cash flows for the six months endedJune 30 : (in millions) 2022 2021 Increase / Decrease Net cash provided by (used in): Operating activities$ 834 $ 722 $ 112 Investing activities 229 (1,259) 1,488 Financing activities (1,050) (768) (282) Operating activities The increase in cash provided by operating activities for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 was primarily driven by higher income from operations. We monitor turnover, aging and the collection of accounts receivable by client. Our DSO calculation includes receivables, net of allowance for doubtful accounts, and contract assets, reduced by the uncollected portion of deferred revenue. Our DSO was 74 days as ofJune 30, 2022 , 71 days as ofJune 30, 2021 , and 69 days as ofDecember 31, 2021 , increasing as revenue growth outpaced collections.
Investing activities
The net cash provided by investing activities for the six months endedJune 30, 2022 was primarily driven by net maturities of investments, partially offset by capital expenditures. Net cash used in investing activities for the six months endedJune 30, 2021 was driven by cash used for acquisitions, net purchases of investments and capital expenditures.
Financing activities
The increase in cash used in financing activities for the six months ended
The Credit Agreement provides for a$750 million Term Loan and a$1,750 million unsecured revolving credit facility, which are due to mature inNovember 2023 . We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan. As ofJune 30, 2022 , we had no outstanding balance on the revolving credit facility. See Note 5 to our unaudited consolidated financial statements. InMarch 2022 , ourIndia subsidiary renewed its one-year13 billion Indian rupee ($165 million at theJune 30, 2022 exchange rate) working capital facility, which requires us to repay any balances drawn down within 90 days from the date of disbursement. There is a 1.0% prepayment penalty applicable to payments made within 30 days after disbursement. This working capital facility contains affirmative and negative covenants and may be renewed annually. As ofJune 30, 2022 , we have not borrowed funds under this facility. Capital Allocation [[Image Removed: ctsh-20220630_g35.jpg]] Acquisitions Share Repurchases Dividend payments We review our capital allocation framework on an ongoing basis, considering our financial performance and liquidity position, investments required to execute our strategic plans and initiatives, acquisition opportunities, the economic outlook, regulatory changes, the potential impacts of the COVID-19 pandemic and other relevant factors. As these factors may change over time, the actual amounts expended on stock repurchase activity, dividends, and acquisitions, if any, during any particular period cannot be predicted and may fluctuate from time to time. While we have not completed any acquisitions in 2022, our longer-term capital allocation framework is unchanged. Cognizant Technology Solutions 36 June 30, 2022 Form 10-Q
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Other Liquidity and Capital Resources Information
We seek to ensure that our worldwide cash is available in the locations in which it is needed. As part of ongoing liquidity assessments, we regularly monitor the mix of domestic and international cash flows and cash balances. We evaluate on an ongoing basis what portion of the non-U.S. cash, cash equivalents and short-term investments is needed locally to execute our strategic plans and what amount is available for repatriation back tothe United States . We expect operating cash flows, cash and short-term investment balances, together with the available capacity under our revolving credit facilities, to be sufficient to meet our operating requirements, including purchase commitments, make Tax Reform Act transition tax payments and service our debt for the next twelve months. The ability to expand and grow our business in accordance with current plans, make acquisitions, meet long-term capital requirements beyond a twelve-month period and execute our capital return plan will depend on many factors, including the rate, if any, at which cash flow increases, our ability and willingness to pay for acquisitions with capital stock and the availability of public and private debt, including the ability to extend the maturity or refinance our existing debt, and equity financing. We cannot be certain that additional financing, if required, will be available on terms and conditions acceptable to us, if at all. Commitments and Contingencies
See Note 10 to our unaudited consolidated financial statements. Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. On an ongoing basis, we evaluate our estimates. The most significant estimates relate to the recognition of revenue and profits, including the application of the cost-to-cost method of measuring progress to completion for certain fixed-price contracts, income taxes, business combinations and valuation of goodwill and other long-lived assets. We base our estimates on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual amounts may differ from the estimates used in the preparation of the accompanying unaudited consolidated financial statements. For a discussion of our critical accounting estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Our significant accounting policies are described in Note 1 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Recently Adopted and New Accounting Pronouncements There have been no changes in the information provided in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Forward Looking Statements The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Exchange Act) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believe," "expect," "may," "could," "would," "plan," "intend," "estimate," "predict," "potential," "continue," "should" or "anticipate" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in various filings made by us with theSEC , in press releases or in oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding our anticipated future revenues or operating margin, earnings, capital expenditures, impacts to our business, financial results and financial condition as a result of the COVID-19 pandemic, the competitive marketplace for talent and future attrition trends, anticipated effective income tax rate and income tax expense, liquidity, financing strategy, access to capital, capital return strategy, investment strategies, cost management, plans and objectives, including those related to our digital practice areas, investment in our business, potential acquisitions, industry trends, client behaviors and trends, the outcome of and costs associated with regulatory and litigation matters, the appropriateness of the accrual related to the India Defined Contribution Obligation and other statements regarding matters that are not historical facts, are based on our current Cognizant Technology Solutions 37 June 30, 2022 Form 10-Q
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expectations, estimates and projections, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Actual results, performance, achievements and outcomes could differ materially from the results expressed in, or anticipated or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including: •economic and political conditions globally, including the invasion ofUkraine byRussia , and in particular in the markets in which our clients and operations are concentrated;
•the continuing impact of the COVID-19 pandemic, or other future pandemics, on our business, results of operations, liquidity and financial condition;
•our ability to attract, train and retain skilled employees, including highly skilled technical personnel and personnel with experience in key digital areas and senior management to lead our business globally;
•challenges related to growing our business organically as well as inorganically through acquisitions, and our ability to achieve our targeted growth rates;
•our ability to achieve our profitability goals and maintain our capital return strategy;
•our ability to meet specified service levels or milestones required by certain of our contracts;
•intense and evolving competition and significant technological advances that our service offerings must keep pace with in the rapidly changing markets we compete in;
•legal, reputation and financial risks if we fail to protect client and/or our data from security breaches and/or cyber attacks;
•the effectiveness of our risk management, business continuity and disaster recovery plans and the potential that our global delivery capabilities could be impacted; •restrictions on visas, in particular inthe United States ,United Kingdom and EU, or immigration more generally or increased costs of such visas or the wages we are required to pay employees on visas, which may affect our ability to compete for and provide services to our clients;
•risks related to anti-outsourcing legislation, if adopted, and negative perceptions associated with offshore outsourcing, both of which could impair our ability to serve our clients;
•risks and costs related to complying with numerous and evolving legal and regulatory requirements and client expectations in the many jurisdictions in which we operate, including the increased stakeholder emphasis on ESG matters; •potential changes in tax laws, or in their interpretation or enforcement, failure by us to adapt our corporate structure and intercompany arrangements to achieve global tax efficiencies or adverse outcomes of tax audits, investigations or proceedings;
•potential exposure to litigation and legal claims in the conduct of our business; and
•the factors set forth in "Part I, Item 1A. Risk Factors" in our Annual Report
on Form 10-K for the year ended
You are advised to consult any further disclosures we make on related subjects in the reports we file with theSEC , including this report in the section titled "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part I, Item 1. Business" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We undertake 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 laws.
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