Cognizant Reports Second Quarter 2020 Results

TEANECK, N.J., July 29, 2020 /PRNewswire/ -- Cognizant Technology Solutions Corporation (Nasdaq: CTSH), one of the world's leading professional services companies, today announced its second quarter 2020 financial results.

Highlights - Second Quarter 2020 as Compared to the Year-ago Period

• Revenue of $4.0 billion, down 3.4% (2.5% in constant currency¹) including a negative 210 basis points impact from the exit of certain content services business and the ransomware attack
• GAAP operating margin was 11.7% vs. 14.9%
• Adjusted Operating Margin¹ was 14.1% vs.16.1%
• Net income was $361 million vs. $509 million
• GAAP diluted EPS was $0.67 vs. $0.90
• Adjusted Diluted EPS¹ was $0.82 vs. $0.94
• First half 2020 bookings¹ increased 14%

"I'm proud of our associates who maintained their focus on clients in the quarter despite being faced with unprecedented challenges," said Brian Humphries, Chief Executive Officer. "We delivered a solid second quarter performance whilst continuing to improve our competitiveness. Against an uncertain economic backdrop, we remain steadfast in investing in our clients and our associates, and in executing our digital strategy to position Cognizant for accelerated momentum."

Second Quarter 2020 Performance by Business Segment

Revenue across our business segments was negatively impacted by the COVID-19 pandemic and the ransomware attack, primarily in the month of April. Revenue and bookings improved sequentially through May and June, with increased client demand in areas such as cloud and enterprise application services, IT modernization and digital engineering.

Financial Services (34.9% of revenues) revenue decreased 5.2% year-over-year, or 4.3% in constant currency, driven by declines in both banking and insurance. North America saw mixed trends with relatively better performance in banking, driven by regional banks. We continue to see weakness across global banking accounts and capital markets.

¹ Constant currency revenue growth, Adjusted Operating Margin and Adjusted Diluted Earnings Per Share ("Adjusted Diluted EPS") are not measurements of financial performance prepared in accordance with GAAP. Bookings is a performance metric utilized by management. See "About Non-GAAP Financial Measures and Performance Metrics" for more information and, where applicable, reconciliations to the most directly comparable GAAP financial measures at the end of this release.

Healthcare (28.9% of revenues) revenue grew 2.0% year-over-year, or 2.2% in constant currency. Segment revenue growth was driven by increases from life sciences clients, specifically by revenues from our acquisition of Zenith. Revenue in healthcare declined low single digits.

Products and Resources (21.7% of revenues) revenue decreased 6.5% year-over-year, or 5.0% in constant currency. The decline was driven by retail, consumer goods, travel and hospitality clients that were particularly adversely affected by the pandemic, partially offset by double-digit constant currency growth in manufacturing, logistics, energy and utilities.   

Communications, Media and Technology (14.5% of revenues) revenue decreased 4.4% year-over-year, or 3.2% in constant currency, driven by a negative 790 basis point impact from our 2019 strategic decision to exit certain content-related services. Excluding that impact, Communications, Media and Technology  grew approximately 5% in constant currency. Communication and media was flat, with the growth of certain communications clients offset by weakness with entertainment clients exposed to studios, cable TV and theme parks.

"We made progress against our cost structure initiative allowing us to fund investments aligned to our long-term growth strategy and delivered solid operating performance in a challenging environment," said Karen McLoughlin, Chief Financial Officer. "Strong free cash flow further strengthened our balance sheet and provides us with ample financial flexibility."

Full Year 2020 Outlook
The Company is providing the following guidance:

• Full year 2020 revenue expected to be in the range of $16.4-16.7 billion, or a decline on a constant currency basis of 2.0-0.5%. This assumes an estimate of a negative 20 basis points foreign exchange impact and a negative 110 basis points impact from the exit of certain content services business
• Full year 2020 Adjusted Operating Margin² expected to be approximately 15%
• Full year 2020 Adjusted Diluted EPS² expected to be in the range of $3.48-3.58

Declaration of Quarterly Cash Dividend

The Company has declared a quarterly cash dividend of $0.22 per share on Cognizant Class A common stock for shareholders of record at the close of business on August 21, 2020. This dividend will be payable on August 31, 2020.

Conference Call
Cognizant will host a conference call on July 29, 2020, at 5:00 p.m. (Eastern) to discuss the Company's second quarter 2020 results. To listen to the conference call, please dial (877) 810-9510 (domestically) or (201) 493-6778 (internationally) and provide the following conference passcode: "Cognizant Call."

The conference call will also be available live on the Investor Relations section of the Cognizant website at http://investors.cognizant.com. Please go to the website at least 15 minutes prior to the call to register and to download and install any necessary audio software. An earnings supplement will also be available on the Cognizant website at the time of the conference call.

² A full reconciliation of Adjusted Operating Margin and Adjusted Diluted EPS guidance to the corresponding GAAP measures on a forward-looking basis cannot be provided without unreasonable efforts, as we are unable to provide reconciling information with respect to unusual items, net non-operating foreign currency exchange gains or losses, and the tax effects of these adjustments.

For those who cannot access the live broadcast, a replay will be available. To listen to the replay, please dial (877) 660-6853 (domestically) or (201) 612-7415 (internationally) and enter 13706875 from two hours after the end of the call until 11:59 p.m. (Eastern) on Wednesday, August 12, 2020. The replay will also be available at Cognizant's website www.cognizant.com for 60 days following the call.

About Cognizant
Cognizant (Nasdaq-100: CTSH) is one of the world's leading professional services companies, transforming clients' business, operating and technology models for the digital era. Our unique industry-based, consultative approach helps clients envision, build and run more innovative and efficient businesses. Headquartered in the U.S., Cognizant is ranked 193 on the Fortune 500 and is consistently listed among the most admired companies in the world. Learn how Cognizant helps clients lead with digital at www.cognizant.com or follow us @Cognizant.

Forward-Looking Statements
This press release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate. These statements include, but are not limited to, express or implied forward-looking statements relating to our expectations regarding the impact of the COVID-19 pandemic on our business,  the impact of the ransomware attack on our clients, business, reputation and financial results, opportunities in the marketplace, our cost structure, investment in and growth of our business, our realignment plans, the timing, cost and impact of the 2020 Fit for Growth Plan, our and our clients' shift to digital solutions and services and our anticipated financial performance. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, legal, reputational and financial risks resulting from cyberattacks, including the ransomware attack, the impact of and effectiveness of business continuity plans during the COVID-19 pandemic, changes in the regulatory environment, including with respect to immigration and taxes, and the other factors discussed in our most recent Annual Report on Form 10-K, as updated by our most recent Quarterly Report on Form 10-Q, and other filings with the Securities and Exchange Commission. Cognizant undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.

About Non-GAAP Financial Measures and Performance Metrics
To supplement our financial results presented in accordance with GAAP, this press release includes references to the following measures defined by the Securities and Exchange Commission as non-GAAP financial measures: Adjusted Income From Operations, Adjusted Operating Margin, Adjusted Diluted EPS, free cash flow, net cash and constant currency revenue growth. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of our non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated.

Our non-GAAP financial measures, Adjusted Operating Margin, Adjusted Income From Operations and Adjusted Diluted EPS exclude unusual items. Additionally, Adjusted Diluted EPS excludes net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments. The income tax impact of each item is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Free cash flow is defined as cash flows from operating activities net of purchases of property and equipment. Net cash is defined as cash and cash equivalents and short-term investments less short-term and long-term debt. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period's foreign currency exchange rates measured against the comparative period's reported revenues.

Management believes providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For our internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors. Therefore, it is our belief that the use of non-GAAP financial measures excluding certain costs provides a meaningful supplemental measure for investors to evaluate our financial performance. Accordingly, we believe that the presentation of our non-GAAP measures, when read in conjunction with our reported GAAP results, can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.

A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and may exclude costs that are recurring such as our net non-operating foreign currency exchange gains or losses. In addition, other companies may calculate non-GAAP financial measures differently than us, thereby limiting the usefulness of these non-GAAP financial measures as a comparative tool. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from our non-GAAP financial measures to allow investors to evaluate such non-GAAP financial measures.

Bookings are defined as total contract value (or TCV) of new contracts, including new contract sales as well as renewals and expansions of existing contracts. Bookings can vary significantly quarter to quarter depending in part on the timing of the signing of a small number of large contracts. Measuring bookings involves the use of estimates and judgments and there are no third-party standards or requirements governing the calculation of bookings. The extent and timing of conversion of bookings to revenues may be impacted by, among other factors, the types of services and solutions sold, contract duration, the pace of client spending, actual volumes of services delivered as compared to the volumes anticipated at the time of sale, and contract modifications, including terminations, over the lifetime of a contract. The majority of our contracts are terminable by the client on short notice often without penalty, and some without notice. We do not update our bookings for material subsequent terminations or reductions related to bookings originally recorded in prior year periods or foreign currency exchange rate fluctuations. Information regarding our bookings is not comparable to, nor should it be substituted for, an analysis of our reported revenues. However, management believes that it is a key indicator of potential future revenues and provides a useful indicator of the volume of our business over time.

Executive transition costs are costs associated with our CEO transition and the departure of our President in 2019. The total costs related to the realignment program are reported in "Restructuring charges" in our unaudited consolidated statements of operations. We do not expect to incur significant realignment charges during the remainder of 2020. Our guidance anticipates pre-tax charges in the range of $0.06 to $0.07 per diluted share for the full year 2020. The tax effect of these charges is expected to be approximately $0.02 per diluted share for the full year 2020.

The effective tax rate related to each of our non-GAAP adjustments varies depending on the jurisdictions in which such income and expenses are generated and the statutory rates applicable in those jurisdictions. 

The above tables serve to reconcile the Non-GAAP financial measures to the most directly comparable GAAP measures. Please refer to the "About Non-GAAP Financial Measures" section of our press release for further information on the use of these Non-GAAP measures.

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SOURCE Cognizant