Cognizant Technology Solutions Corp: Form 10-Q for the period ended Mar 31, 2024

Executive Summary

Cognizant is one of the world’s leading professional services companies, engineering modern businesses and delivering strategic outcomes for our clients. We help clients modernize technology, reimagine processes and transform experiences so they can stay ahead in a fast-changing world. We provide industry expertise and close client collaboration, combining critical perspective with a flexible engagement style. 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. Our collaborative services include digital services and solutions, consulting, application development, systems integration, quality engineering and assurance, application maintenance, infrastructure and security as well as business process services and automation. Digital services continue to be an important part of our portfolio, aligning with our clients' focus on becoming data-enabled, customer-centric and differentiated businesses.

In the second quarter of 2023, we initiated the NextGen program aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning office space to reflect the post-pandemic hybrid work environment. Our drive for simplification includes operating with fewer layers in an effort to enhance agility and enable faster decision making. We expect the savings generated by the program to help fund continued investments in our people, revenue growth opportunities and the modernization of our office space.

In connection with the NextGen program, in the first quarter of 2024 we incurred $23 million of employee separation, facility exit and other costs. Since the inception of the program, we incurred $252 million in total costs. See Note 4 to our unaudited consolidated financial statements. We currently expect to incur costs of approximately $70 million for the full year 2024, which is expected to bring the total charges under the program to approximately $300 million. The estimates of the charges and expenditures that we expect to incur in connection with the NextGen program, and the timing thereof, are subject to a number of assumptions, including local law requirements in various jurisdictions, and actual amounts may differ materially from estimates. In addition, we may incur other charges or cash expenditures not currently contemplated due to unanticipated events that may occur in connection with the NextGen program.

Q1 2024 Financial Results1

Revenue

Income from Operations

Operating Margin

Diluted EPS

GAAP Adjusted1

GAAP Adjusted1

GAAP Adjusted1

Revenue down $52 million or 1.1% from Q1 2023; a decline of 1.2% in constant currency1 Income from Operations down $7 million or 1.0% from Q1 2023 Adjusted Income from Operations1 up $16 million or 2.3% from Q1 2023 Operating margin remained flat from Q1 2023 Adjusted Operating Margin1 up 50 bps from Q1 2023 Diluted EPS down $0.04 or 3.5% from Q1 2023 Adjusted Diluted EPS1 up $0.01 or 0.9% from Q1 2023

1 Adjusted Income from Operations, Adjusted Operating Margin, 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 25 March 31, 2024 Form 10-Q

During the quarter ended March 31, 2024, revenues decreased by $52 million as compared to the quarter ended March 31, 2023, representing a decrease of 1.1%, or a decrease of 1.2% on a constant currency basis2. Revenues were negatively impacted by weakness in our Financial Services and Health Sciences segments, partially offset by revenue growth in Communications, Media and Technology and Products and Resources segments. Our recently completed acquisitions contributed 70 basis points to revenue growth, primarily benefiting our Communications, Media and Technology and Products and Resources segments.

Our operating margin remained flat at 14.6% and Adjusted Operating Margin2 increased to 15.1% for the quarter ended March 31, 2024 from operating margin and Adjusted Operating Margin of 14.6% each for the quarter ended March 31, 2023. Our 2024 GAAP and Adjusted Operating Margins were positively impacted by savings generated from our NextGen program and the benefit of the depreciation of the Indian rupee against the U.S. dollar, partially offset by increased compensation costs and the impact of the resale of third-party products in connection with our integrated offerings strategy. In addition, our 2024 GAAP operating margin was negatively impacted by the NextGen charges, as discussed in Note 4 to our unaudited consolidated financial statements, which were excluded from our Adjusted Operating Margin.

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. We closely monitor attrition trends focusing on the metric that we believe is most relevant to our business. This metric, which we refer to as Voluntary Attrition - Tech Services, includes all voluntary separations with the exception of employees in our Intuitive Operations and Automation practice. For the trailing twelve months ended March 31, 2024 our Voluntary Attrition - Tech Services was 13.1% as compared to 23.1% for the trailing twelve months ended March 31, 2023. We finished the first quarter of 2024 with approximately 344,400 employees as compared to 351,500 employees at the end of the first quarter of 2023.

Business Outlook

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. We believe clients will 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 and geopolitical factors, including the uncertainty related to the global economy, which has affected and may continue to affect their demand for our services.

We increasingly use AI-based technologies, including GenAI, in our client offerings and our own internal operations. AI technologies and services are part of a highly competitive and rapidly evolving market. We plan to make significant investments in our AI capabilities to meet the needs of our clients and harness its value in a flexible, secure, scalable and responsible way. As AI-based technologies evolve, we expect that some services that we currently perform for our clients will be replaced by AI or forms of automation. This may lead to reduced demand for certain services or harm our ability to obtain favorable pricing or other terms for our services.

We currently expect to incur total costs of approximately $300 million in connection with the NextGen program, which started in the second quarter of 2023, with approximately $70 million of such costs anticipated in 2024. See "Executive Summary." In addition to the NextGen program, potential tax law and other regulatory changes, including possible U.S. corporate income tax reform and the Code on Social Security, 2020 in India, among other items, may impact our future results. We expect that the Code on Social Security, 2020, if enacted as currently written, could result in a material one-time increase to our post-employment liability for past service and would also modestly increase our costs for employment and post-employment benefits prospectively. In addition, in March 2024, India and Mauritius signed a Protocol to amend the India-Mauritius Income Tax Treaty. We are currently evaluating the potential impact of the amendment, which, depending on its final terms when entered into force, could increase our effective income tax rate, as CTS India is a subsidiary of our wholly-owned Mauritius entity.

2 Adjusted Operating Margin 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 26 March 31, 2024 Form 10-Q

Results of Operations

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

The following table sets forth, for the periods indicated, certain financial data for the three months ended March 31:

(Dollars in millions, except per share data)

(a) Exclusive of depreciation and amortization expense.

N/A Not applicable

Revenues

During the quarter ended March 31, 2024, revenues decreased by $52 million as compared to the quarter ended March 31, 2023, representing a decrease of 1.1%, or a decrease of 1.2% on a constant currency basis3. Our recently completed acquisitions contributed 70 basis points to the change in revenue.

3Adjusted Income from Operations, Adjusted Operating Margin, 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 27 March 31, 2024 Form 10-Q

Revenues - Reportable Business Segments and Geographic Markets

Revenues of $4,760 million across our business segments and geographies were as follows for the three months ended March 31, 2024:

(Dollars in millions)

(Dollars in millions)

Change in revenues was driven by the following factors:4

• Reduced demand for discretionary work negatively impacted revenues across all segments. Clients in our Financial Services segment were particularly affected;
• Recently completed acquisitions contributed 70 basis points of growth to the overall change in revenues, including 240 basis points of growth to our Communications, Media and Technology segment (primarily in Continental Europe) and 80 basis points of growth to our Products and Resources segment (primarily in North America);
• The resale of third-party products in the Health Sciences segment in North America, and the Communications, Media and Technology segment in Continental Europe, in connection with our integrated offerings strategy, contributed 110 basis points of growth to the overall change in revenue;
• Health Sciences revenues were negatively impacted by the renegotiation of a large contract with a payer client in 2023, which reduced the scope of services but improved the profitability of the contract;
• North America revenues in the Communications, Media and Technology segment were positively impacted by the ramp up of several recently won large deals;
• Revenues in the Continental Europe region were additionally driven by increased demand from pharmaceutical clients within the Health Sciences segment; and
• Revenue declines in our United Kingdom and Rest of World regions were primarily driven by weakness in the Financial Services segment.

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 and reconciliations to the most directly comparable GAAP financial measures, as applicable.

Cognizant Technology Solutions 28 March 31, 2024 Form 10-Q

Cost of Revenues (Exclusive of Depreciation and Amortization Expense)

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 costs of third-party products and services relating to revenues. The increase, as a percentage of revenues, was due to higher compensation costs for delivery personnel and the impact of the resale of third-party products in connection with our integrated offerings strategy, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar.

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 driven by savings generated from our NextGen program.

Restructuring Charges

Restructuring charges consist of costs related to the NextGen program. Restructuring charges were $23 million or 0.5%, as a percentage of revenue for the three months ended March 31, 2024. For further detail on our restructuring charges see Note 4 to our unaudited consolidated financial statements.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by 0.8% and increased by 0.1% as a percentage of revenues, during the first quarter of 2024 as compared to the first quarter of 2023.

Operating Margin and Adjusted Operating Margin5 - Overall

Our 2024 first quarter GAAP operating margin and Adjusted Operating Margin5 were positively impacted by savings generated from our NextGen program and the benefit of the depreciation of the Indian rupee against the U.S. dollar, partially offset by increased compensation costs and the impact of the resale of third-party products in connection with our integrated offerings strategy. In addition, our 2024 GAAP operating margin was negatively impacted by the NextGen charges, as discussed in Note 4 to our unaudited consolidated financial statements, which were excluded from our Adjusted Operating Margin.

A predominant portion of our costs in India are denominated in the Indian rupee, representing approximately 24% of our global operating costs during the three months ended March 31, 2024. These costs are subject to foreign currency exchange rate fluctuations, which have an impact on our results of operations. 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. Net of the impact of the hedges, the depreciation of the Indian rupee positively impacted our operating margin for the three months ended March 31, 2024 by 45 basis points as compared to the three months ended March 31, 2023.

5 Adjusted Income from Operations and Adjusted Operating Margin 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 29 March 31, 2024 Form 10-Q

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 20 basis points during the three months ended March 31, 2024. 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 19 basis points (excluding the impact of the hedges). The settlement of our cash flow hedges had no impact on our operating margin during the three months ended March 31, 2024, compared to a negative impact of 25 basis points during the three months ended March 31, 2023.

Segment Operating Profit

Segment operating profit and operating margin percentage were as follows:

Segment operating profit% Segment operating margin

In 2024, segment operating margins across all our segments were negatively impacted by increased compensation costs, partially offset by the benefit of the depreciation of the Indian rupee against the U.S. dollar and savings generated from our NextGen program. Segment operating profit in Health Sciences and Communications, Media and Technology segments was negatively impacted by resales of third-party products in connection with our integrated offerings strategy. Segment operating profit in the Communications, Media and Technology segment was further negatively impacted by higher costs typical to the initial phases of several recently won large deals in this segment.

Total segment operating profit and operating margin were as follows for the three months ended March 31:

(Dollars in millions)

Other Income (Expense), Net

The following table sets forth total other income (expense), net for the three months ended March 31:

(in millions)

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 and losses 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 of March 31, 2024, the notional value of our undesignated hedges was $1,119 million. Interest income for the three months ended March 31, 2024 remained flat as compared to the same period in 2023. While our invested balances decreased during the three months ended March 31, 2024 due to the required payment related to the ITD dispute in January 2024 (see Note 8 to our unaudited consolidated financial statements), we benefited from higher interest rates compared to the three months ended March 31, 2023.

Cognizant Technology Solutions 30 March 31, 2024 Form 10-Q

Provision for Income Taxes

The effective income tax rate in 2023 benefited from the effective settlement of the IRS examination for tax years 2017 and 2018.

In December 2021, the OECD adopted model rules for a global framework to impose a 15% global minimum tax referred to as Pillar Two with an effective date of January 1, 2024. Although Management continues to monitor additional guidance from the OECD and countries’ implementation of Pillar Two, based on current guidance, there was no material impact for the three months ended March 31, 2024 and we believe that our net income, cash flows, or financial condition will not be materially impacted in the future by Pillar Two.

Net Income

The decrease in net income was primarily driven by a higher effective tax rate.

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.

Our non-GAAP financial measures Adjusted Operating Margin and Adjusted Income from Operations excludes unusual items, such as NextGen charges. Our non-GAAP financial measure Adjusted Diluted EPS excludes unusual items, such as NextGen charges, and net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. For further detail on the NextGen charges, see Note 4 to our unaudited consolidated financial statements. The income tax impact of each item excluded from Adjusted Diluted EPS 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, read in conjunction with our reported GAAP results and 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.

Cognizant Technology Solutions 31 March 31, 2024 Form 10-Q

The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the three months ended March 31:

(1) Consists of employee separation, facility exit and other costs incurred in connection with the NextGen program. See Note 4 to our unaudited consolidated financial statements for additional information.

(2) 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.

(3) Presented below are the tax impacts of our non-GAAP adjustment to pre-tax income:

(in millions)

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.

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 March 31, 2024, we had cash, cash equivalents and short-term investments of $2,243 million and available capacity under our credit facilities of approximately $1.9 billion.

The following table provides a summary of cash flows for the three months ended March 31:

(in millions)

Operating activities

The decrease in cash provided by operating activities for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily driven by the $360 million payment made in relation to our dispute with the ITD in January 2024 (see Note 8 to our unaudited consolidated financial statements), lower collections of our trade accounts receivable and higher tax payments.

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 78 days as of March 31, 2024, an increase of 1 day from 77 days as of December 31, 2023. Our DSO was 73 days as of March 31, 2023, a decrease of 1 day from 74 days as of December 31, 2022.

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Investing activities

The increase in cash used in investing activities for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily driven by lower net maturities of investments in 2024 as compared to 2023.

Financing activities

The decrease in cash used in financing activities for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was primarily driven by lower repurchases of common stock.

We have a Credit Agreement providing for a $650 million Term Loan and a $1,850 million unsecured revolving credit facility, which are each due to mature in October 2027. We are required under the Credit Agreement to make scheduled quarterly principal payments on the Term Loan. We believe that we currently meet all conditions set forth in the Credit Agreement to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the revolving credit facility as of March 31, 2024 and through the date of this filing. As of March 31, 2024, we had no outstanding balance on the revolving credit facility. See Note 7 to our unaudited consolidated financial statements.

As of December 31, 2023, our India subsidiary had a 15 billion India rupee ($180 million at the December 31, 2023 exchange rate) working capital facility. This facility expired in March 2024. We have never borrowed funds under this facility or any of its predecessor facilities.

Capital Allocation

Acquisitions

Share Repurchases

Dividend payments

We review our capital allocation 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 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.

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 our ongoing liquidity assessments, we regularly monitor the mix of our 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 to the 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, tax payments, including Tax Reform Act transition tax payments, and servicing 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 of 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 12 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

Cognizant Technology Solutions 33 March 31, 2024 Form 10-Q 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 ended December 31, 2023. 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 ended December 31, 2023.

Recently Adopted and New Accounting Pronouncements

There have been no changes in the information provided regarding recently adopted and new accounting pronouncements in our Annual Report on Form 10-K for the year ended December 31, 2023.

There have been no material changes in our quantitative and qualitative disclosures about market risk from those disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 14, 2024.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our chief executive officer and our chief financial officer, evaluated the design and operating effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2024. Based on this evaluation, our chief executive officer and our chief financial officer concluded that, as of March 31, 2024, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on February 14, 2024.