Cognizant Technology Solutions Corporation (CTSH)

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Cognizant Technology Solutions (CTSH)

Q1 2011 Earnings Call

May 03, 2011 8:00 am ET


David Nelson - VP, IR

Francisco D'Souza - Chief Executive Officer, President and Director

Gordon Coburn - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Treasurer


Joseph Foresi - Janney Montgomery Scott LLC

Julio Quinteros - Goldman Sachs Group Inc.

George Price - BB&T Capital Markets

Bryan Keane - Crédit Suisse AG

Tien-Tsin Huang - JP Morgan Chase & Co

Moshe Katri - Cowen and Company, LLC

Rod Bourgeois - Sanford C. Bernstein & Co., Inc.

Edward Caso - Wells Fargo Securities, LLC

Joseph Vafi - Jefferies & Company, Inc.

Darrin Peller - Barclays Capital

Ashwin Shirvaikar - Citigroup Inc

Nabil Elsheshai - Pacific Crest Securities, Inc.

Glenn Greene - Oppenheimer & Co. Inc.



Ladies and gentlemen, welcome to the Cognizant Technology Solutions' First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasury at Cognizant. Please go ahead, sir.

David Nelson

Thank you, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2011 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Francisco D'Souza, President and Chief Executive Officer; and Gordon Coburn, Chief Financial and Operating Officer of Cognizant Technology Solutions.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. I would now like to turn the call over to Francisco D'Souza. Francisco?

Francisco D'Souza

Thank you, David, and good morning, everyone. Thanks for joining us today. I'm pleased to announce another solid quarter for Cognizant. Our first quarter revenue grew more than 4.5% sequentially, and 43% over last year to over $1.37 billion. Our non-GAAP operating margin came in half a point higher than our 19% to 20% target range, positioning us well to absorb promotion and wage increases scheduled to take -- to start taking effect during the second quarter. Our growth was broadly consistent across industries, with the exception of our Manufacturing, Logistics, Retail and Hospitality segment, which stood out with close to 13% sequential revenue growth, as our Retail clients came out of the traditional IT lockdown associated with the fourth quarter holiday shopping season.

Across geographies, growth reflects the uneven economic recovery. Our North American revenues grew nearly 6% sequentially, which reflects solid performance, especially given the absence of last year's pent-up demand. Growth in other geographies was more muted. Our businesses in Asia, the Middle East and Latin America, the markets we collectively refer to as the Rest of the World, showed a slight decline in revenue, and Europe overall grew approximately 1.5% sequentially.

While our European results were partially the result of the expected ramp down in certain M&A related projects, demand in the region was generally soft. However, our pipeline of deals in these regions, particularly in Europe, remains strong. As we look ahead to 2011, our core strengths, our unique financial model, our trusted client relationships and our board and global delivery network, give us confidence in our ability to deliver industry-leading growth by helping clients navigate the present and embrace what we call the Future of Work.

Although we don't expect to benefit from pent-up demand and M&A integration work as we did last year, our outlook remains optimistic. As a result of that, we expect Q2 revenue to be at least $1.45 billion, and are increasing our guidance for the full year 2011 to at least $5.925 billion or at least 29% year-over-year growth. This guidance reflects healthy demand in North America, paired with a pickup over the course of the year in Europe and the Rest of the World.

Across our business, I'd like to now spend a little bit of time pointing out areas of particular strength and opportunity for Cognizant. As we said in the past, our clients are simultaneously balancing 2 mandates as they emerge from the recession. First, they thrive to continue the efficiency and effectiveness of established processes and infrastructure into which decades of investments have been made. And second, to invest in the transformational capabilities in order to remain competitive and to drive top line growth for their businesses.

Cognizant has long positioned itself as a trusted consultive partner with a deep understanding of our clients' businesses. This is perhaps best illustrated by the fact that in 2010, our top 10 clients each accounted for more than $100 million in revenue. And this quarter, the total number of client that we consider to be strategic stands at 173. It's these types of deep relationships that give us the opportunity to help clients balance their dual mandates.

So first, we're helping clients to operate and improve existing processes and IT infrastructure, and we think of this as the natural growth and extension of our established business model. Coming out of the downturn, this has manifested itself as a share shift, as companies drive new tranches of work and corresponding budget to global delivery models. We estimate that these newer service lines such as Analytics, Business Process Outsourcing and IT Infrastructure Services collectively represent a market opportunity that's nearly 4x larger than our traditional application, development and maintenance market. As an example, when Marks & Spencer Group, one of the U.K.'s leading retailers, needed to free up investment capital for a multi-year growth strategy, they selected Cognizant to help improve operational efficiencies, drive business effectiveness, and enhance their already superior customer experience. Our managed services approach achieves this by blending traditional application services and newer Infrastructure Services to support mission-critical processes, spanning multiple lines of business and functional areas such as procurement, supply chain, forecasting, sales, stock replenishment and financial management.

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