UNIVERSITY OF OREGON INVESTMENT GROUP April 23 rd, 2010 Technology Cognizant Technology Solutions Corp. Stock Data Price (52 weeks) 19.42 52.68 Symbol/Exchange CTSH / NASDAQ Beta 1.235 Shares Outstanding 297,561,219 Average daily volume 3,601,050 (3 month average) Current market cap $15.39 B HOLD Current Price Dividend Dividend Yield $50.81 0.00 N/A Valuation (per share) DCF Analysis $34.86 Comparables Analysis Target Price Current Price $56.00 $34.86 $50.81 (as of April 19) Summary Financials (in thousands) 2009A Revenue $3,278,663 Net Income $534,963 Operating Cash Flow $624,334 BUSINESS OVERVIEW Cognizant Technology Corporation was founded in 1994 with the main objective of offering competitive solutions to complex software development and maintenance issues. The company was created as part of the maintenance and development services arm of The Dun & Bradstreet Corporation. It was then spun off as an independent organization and issued its IPO in June 1998. It is headquartered in Teaneck, New Jersey and has significant international operations. Covering Analyst: Liam Bain Email: lbain@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.
Today, the company s goals are nearly the same as when it was founded. Cognizant strives to be the leading provider of e-business and application development projects while taking full responsibility for its clients software systems. Cognizant s business is organized and managed around four vertically-oriented business segments: Financial Services o Banking Focuses on traditional retail and commercial banks, as well as diversified financial enterprises. The company assists its banking clients in many areas, such as consumer lending, risk management, investment management, and retail banking. o Insurance Assists the needs of casualty and property insurers, life insurers, and insurance brokers. The company assists its insurance customers in many areas, such as business acquisition, claims processing, management reporting, and regulatory compliance. Healthcare o Healthcare Works with a variety of leading healthcare organizations. The company provides services to healthcare companies in many areas, such as sales & underwriting systems, plan administration, billing, claims processing, and pharmacy benefit management. o Life Sciences Works with many of the world s leading pharmaceutical companies operating in the Life Sciences industry and provides solutions to the challenges of their evolving market. Some of this challenges include issues surrounding consolidation, data integration, safety, and regulations. Manufacturing, Retail, and Logistics o Manufacturing and Logistics Helps companies improve operational efficiencies, enhance responsiveness, and deal more directly with trade partners to ultimately provide greater value to their end customers. The company provides supply chain management solutions to these companies as well as optimization solutions. o Retail and Hospitality Serves a wide variety of retailers and distributors, including specialty premium retailers, supermarkets, and large discounters. The company also serves the entire travel and hospitality industries including airlines, hotels, and restaurants. Some of the serves provided to these companies by Cognizant include: supply chain management, warehouse management, and logistics management. Other o Communications Serves leading communications services providers. The company provides many services to these companies, such as network management services, conformance testing, product lifecycle management, and product implementation. o Information, Media, and Entertainment Serves the world s leading media and entertainment companies. The company provides many services to these companies, such as Digital Rights Management(DRM), content management, workflow automation, and advertising management. o High Technology Serves Independent Software Vendors (ISVs) and Online Service Providers 2
PRODUCTS AND SERVICES OVERVIEW The company s solutions include IT Consulting, application development and integration, application management, and re-engineering services. IT Consulting Cognizant s consulting division, Cognizant Business Consulting, helps clients to receive greater value and ensures that their IT requirements are met. The company s consulting offerings are based on tried and proven strategies. At CTSH, employees analyze the existing environment, indentify possible areas for optimization or improvement, and create complete roads maps that ultimately lead to productivity improvement and cost savings for clients. Application Design, Development, Integration and Re-engineering Cognizant uses various internet technologies to define customer requirements, create designs and specifications, and ultimately test and integrate software across multiple platforms. Applications development services are provided using what the company calls its full life-cycle application development approach. Essentially, this means that the company assumes total responsibility and accountability for the analysis, design, and implementation of clients systems from start to finish. Software Testing The Software Testing service offering is one of Cognizant s fastest growing areas. The company provides independent verification and validation services that are focused entirely on supporting clients software testing needs. There are four main offerings in this area: Independent Functional Testing, Test Automation, Test Process Consulting, and Performance Testing. BUSINESS AND GROWTH STRATEGIES Cognizant doesn t go into much detail about growth strategies in its 10-K report. The following are the only areas that are discussed: Domestic and International Growth. Cognizant mentions how it hopes to expand its current operations in Europe, Asia, Middle East, and Latin America. The company plans to open additional sales and marketing offices in North America, Europe, Latin America and Asia. The expansion is expected to facilitate sales and service to existing and new customers. As well as wanting to expand in domestic metropolitan areas, Cognizant states in its 10-K that it has been pursuing market opportunities internationally through international sales and marketing offices in various cities. Mergers, Acquisitions and Joint Ventures. Cognizant believes that the fragmented market in which it operates provides opportunities to expand its business through selective strategic acquisitions, strategic alliances, and joint ventures. The company believes that candidates for acquisitions and joint ventures may enable it to expand geographic presence and capabilities. The company has historically relied greatly on this area to sustain growth. In 2009, the company completed 4 acquisitions. In December 2009, Cognizant acquired the stock of UBS India Service Centre Private Limited ( UBS ISC ). This acquisition gave Cognizant the benefit of multi-year service agreements, an assembled workforce, land, and equipment. In Quarter 3 2009, Cognizant entered into an agreement with Invensys which gave the company a multi-year service agreement and an assembled workforce. The other two acquisitions were carried out to strengthen Cognizant s retail and infrastructure management capabilities and are not discussed in the company s 10K. For more information about merger, acquisition, and joint venture activity, refer to Appendix 7. 3
MANAGEMENT AND EMPLOYEE RELATIONS Currently, Cognizant Technology Solutions Corporation is led by President and Chief Executive Officer Francisco D Souza. He was a part of the team that founded the company in 1994. In 2007, he took over from Lakshmi Narayanan, who was promoted to Vice Chairman. Mr. D'Souza is among the youngest Chief Executive Officers in the software services sector. Mr. D'Souza has over 20 years of experience in the information technology industry, in both operational and advisory roles. His past roles with the company have included Chief Operating Officer and Senior Vice President for North American Operations and Business. Gordon Coburn was promoted to Chief Operating Officer in 2007. Mr. Coburn also continues to serve as Chief Financial Officer and Treasurer, positions he has held since 1998. Mr. Coburn served as Executive Vice President from 2003 to 2006. From 1999 to 2003, he served as Senior Vice President. Prior to his work with Cognizant, Mr. Coburn held key financial positions with The Dun & Bradstreet Corporation. Mr. Coburn holds a Bachelor of Arts degree from Wesleyan University and a Master of Business Administration degree from the Amos Tuck School at Dartmouth College. Name Title Base Salary Target Bonus (80% of Base) Total Compensation Francisco D Souza President and Chief Executive Officer $539,100 $431,280 $970,380 Gordon Coburn Chief Financial and Operating Officer and Treasurer $485,200 $388,160 $873,360 Ramakrishnan Chandrasekaran President and Managing Director, Global Delivery $168,500 $134,800 $303,300 Rajeev Mehta Chief Operating Officer, Global Client Services $386,900 $309,520 $696,420 Lakshmi Narayanan Vice Chairman $100,000 $80,000 $180,000 *FIGURES ARE FOR FISCAL YEAR 2010 RECENT NEWS 03/30/10 Reasons to BUY Cognizant Technology Solutions. Earnings growth has been fairly steady, despite the economic downturn. Earnings rose 22% in the fourth quarter. Looking forward, analysts predict earnings will rise 8% this year and 12% next year. So that s something to keep in mind. The stock carries a 98 Composite Rating, the highest in its Computer-Tech Services industry group. This news didn t have a noticeable effect on the stock s price but helps investors see the potential of CTSH. 03/24/10 S&P Maintains BUY Opinion on Shares of Cognizant Technology Solutions Corp. We look for revenue growth of 21% this year, aided by acquisitions and increased demand for offshore outsourcing as clients continue to look for cost savings. It is likely that increases in spending on discretionary services will be slow to materialize, however (S&P). This piece of news didn t have a noticeable effect on Cognizant s share price. It simply reiterated a BUY opinion to buyers who may be leery about becoming shareholders in the company. 4
INDUSTRY The global market for IT services is large, with many diverse services being offered. The International Data Corporation estimates that the total market for IT services was approximately $800 billion in 2008, and it believes the market will increase at a compound annual growth rate (CAGR) of 5.1% through 2013 (IDC). Due to advances in technology in nearly all areas of the world, there is intense international competition for IT services companies. Cognizant Technology Solutions Corporation operates in the IT Consulting & Other Services sub-industry. According to comments from companies in the IT Consulting sub-industry, there is an increased level of caution on IT services spending for large scale systems integration projects. So far in 2010, this industry has realized a profit margin before tax of approximately 7%. These levels of profit have been decreasing each year since 2006. IT consulting firms have experienced this as priceconscious clients cut back on IT spending I believe that a lot of this is due to the economic downturn, and it will likely only continue through the first half of 2010. After this, I expect that increased spending can be expected. New contract signings in this industry were also down due to the uncertain U.S. economy. Due to the uncertain economic landscape, I feel that there may only be modest near-term growth prospects. However, it is evident that companies are supplementing growth through increased acquisitions and partnerships. For example, Dell recently Perot Systems while Xerox acquired Affiliated Computer Services, both of which are providers of IT services. In the future, it is expected that merger and acquisition (M&A) activity will pick up again as individual companies look to acquire companies that are undervalued. Another strategy that may be coming into play involves the duration of IT service contacts. As mentioned, companies in this industry appear to be becoming more leery of investing in long-term large scale systems integration projects. As such, there has been a trend of smaller, shorter duration IT service contracts, which contribute to reduced upfront costs and faster investment returns. Increased competition has also led to decreasing rates of profitability in this industry. Unlike the late 1990s where the industry experienced exponential growth, IT consulting services is believed by many to be in the mature stage of its life cycle On a side note, as you can see from the stock performance chart above, companies operating in the IT Consulting & Other Services sub-industry have marginally outperformed both the S&P 500 and firms in the information technology industry. Another recent industry trend is outsourcing. I expect that this positive trend will continue into the foreseeable future as companies attempt to lower labor costs. 5
S.W.O.T. ANALYSIS Strengths International Exposure: Historically, CTSH has been greatly involved in international operations. These operations have accounted for approximately 21% of total revenues. The company plans to continue expanding across the globe. No Long Term Debt: The company doesn t carry any long term debt which shows that it can grow effectively without outside influence. Cognizant seems rather conservative because it carries no long term debt but carries a high ROE that might justify leverage. Strong Demand for Services: Year after year, Cognizant has experienced an increase in demand for its services. This is supported by the company s explosive revenue growth in recent years. Weaknesses Limited Presence Outside United States: The company understands this problem and is dedicated to expanding it s international and domestic presence. Opportunities Potential Growth in Emerging Markets: There are vast opportunities internationally, especially in China, for providers of IT consulting and other services to expand. Consolidation: The larger players in this industry serve corporations around the World. However, there are tons of smaller firms that serve small business and households. Mergers and Acquisitions offer an opportunity for firms in the IT Consulting and Other Services industry to gain access to these smaller market segments. Larger Government = More Consulting Work: Over the past few years, government spending on this industry s services has been increasing. Typically, governments require IT Consultants to help protect against cyber attacks on government servers. Threats Increasing Competition: Competition is intense in the IT services industry. Recent reports have indicated that the sector in which CTSH is operating is likely to face increasing competition in offshore outsourcing. Foreign Exchange Rates: There are significant risks involving the rising wages of Indian employees and also the gradual appreciation of the rupee. Tough Environment: The global economic downturn severely affected all companies in all sectors and industries. Although the demand environment in the United States in recovering, it is still at historically low levels. This is most evident in the financial services sector. Because the financial services sector represents a large customer, it can greatly affect revenues for the IT Consulting and Services industry Decrease in Profitability: There has been a recent trend of decreasing profitability in the IT Services and Consulting industry that could worsen going into the future. 6
PORTER S 5 FORCES ANALYSIS Supplier Power High The IT Consulting and Other Services industry is highly competitive. It requires various inputs including hardware, employees, software tools, and other devices. Moreover, it is necessary that employees have a high level of technical knowledge and expertise. Barriers to Entry Low Barriers to entry are low in the IT Consulting and Other Services industry. One main reason that IT consulting has low barriers to entry is because the industry is labor driven. As a result, with knowledge of IT systems, anybody is hypothetically able to establish a business. Buyer Power High Overall, buyer power is moderate in this industry. Contracts with customers, typically large companies, are secured after a formal bid process. Consequently, these customers exhibit greater buyer power. Threat of Substitutes Moderate Overall there is a moderate threat from substitutes in this industry. There are many companies offering a diverse range of consulting and other services that are comparable to that offered by Cognizant. Degree of Rivalry High There is a great deal of competition among firms operating in the IT Consulting and Other Services Industry. Some of Cognizant s competitors include companies with much greater resources, such as Computer Sciences Corporation. COMPARABLES ANALYSIS To identify Cognizant s competitors, I searched for companies that operate using similar business models. I mainly researched information technology companies that are directly competing with Cognizant in the sub industry of IT Services. Infosys Technologies Ltd. (INFY) 35% Infosys is a global IT services company headquartered in India that went public in 1993. INFY offers business solutions to clients that leverage all aspects of the software life cycle. These solutions include consulting, design, development, re-engineering, maintenance, systems integration, and package evaluation and implementation. Infosys also offers software solutions aimed at specific industries, such as banking. Infosys leverages its global client base and its professional workforce through what it calls the Global Delivery Model. The company divides projects into components, which it executes simultaneously in several different locations: on the client's site and at Infosys development centers in India and around the world. In order to expand its product and solutions offerings, the company is looking to build its expertise in emerging trends, new technologies, specific industries and business issues (S&P). 7
Wipro Ltd. (WIT) 35% Wipro Limited was incorporated in 1945 as Western India Vegetable Products Limited. Since then, the company has diversified away from vegetable products into IT services to become one of the top global IT services firms, with three major subsidiaries. The company is headquartered in India. Wipro divides its business into three key segments. Global IT Services, BPO services, and research and development services in the areas of hardware and software design (S&P). I have chosen Infosys and WiPro as the main competitors of Cognizant Technology Solutions for several reasons. First, these two companies are mentioned in the company s 10-K reports and published on financial research sites as being Cognizant s main competitors. They compete head-to-head in the same markets and offer the same products as Cognizant. Moreover, all three companies hold similar goals of wanting to expand product and solutions offering in order to provide greater value to consumers. I expect Infosys and Wipro to provide aggressive competition for the company due to strengthening of their brands, financial size, and overall market positions. As such, I have weighted both at 35% each. *Note: Because the companies are headquartered internationally, Infosys and Wipro offer American Depositary Shares (ADSs) in the United States. Each ADS represents one equity share of each respective company. Computer Sciences Corporation (CSC) 20% Computer Sciences Corporation (CSC) is engaged in the information technology (IT) and professional services industry. CSC offers an array of services to clients in the commercial and government markets. Its service offerings include IT and business process outsourcing, and IT and professional services. Outsourcing involves operating all or a portion of a customer's technology infrastructure, including systems analysis, applications development, network operations, desktop computing and data center management. IT and professional services include systems integration, consulting and other professional services. Consulting and professional services includes advising clients on the acquisition and utilization of IT and on business strategy, security, modeling, simulation, engineering, operations, change management and business process reengineering. In December 2008, the Company acquired Object Builder Software. In August 2009, the Company acquired BearingPoint's operation in Brazil. Computer Sciences Corporation was also mentioned in Cognizant s 10-K report as being a competitor. CSC was named as being a large IT service provider that has greater resources than Cognizant. While some may interpret this as being bad, Cognizant believes that as a result it is able to specialize much more effectively than CSC. Even though Computer Sciences Corporation does carry a similar product offering, it is involved in quite a few activities that Cognizant is not. Therefore, it is weighted at only 20%. 8
Sapient Corporation (SAPE) 10% Sapient Corporation is a global services company. It also provides traditional advertising capabilities, offering a multi-channel marketing and commerce solution for clients. Sapient provides business and information technology (IT) strategy, process and system design, program management, custom development and package implementation, systems integration and outsourced services, including testing, maintenance and support. Sapient was chosen as a primary competitor due to its offering of IT strategy services and full life-cycle process and system design services. However, because it mainly provides interactive marketing and design services, it is not as comparable as the other aforementioned companies. As such, Sapient was weighted at only 10%. Metrics Used in Comparables Analysis EV/Revenue I chose this metric to determine the size of the company relative to its ability to produce revenues. EV/EBITDA I used this metric to assess the profitability of the company against its competitors because it limits the effect of differences in accounting and financing. EV/Operating Cash Flows I used this measure to compare the firm s total value to how much cash it generates. DISCOUNTED CASH FLOW ANALYSIS I chose to use the percentage of sales method to estimate revenues, cost of goods sold, and future free cash flows. I derived an implied stock price from discounting future cash flows and determining the net present value of the company. Revenue Cognizant Technology Solutions Corp. has experienced a period of significant growth lately. Revenue growth over the past few years has been as high as 61% and as low as 16%. It is expected that as the economy recovers, Cognizant will do even better. However, it is not feasible to expect revenues to grow more than 30% ever again. The company is simply becoming too large and, as a result, this sort of growth would be very unlikely. As such, I have total revenue growth dropping into the foreseeable future with growth in the terminal year of 3%. Revenue from the financial services segment has decreased in recent years in light of the economic meltdown. Because of this, it is likely to become a smaller part of Cognizant s total revenue. I ve projected it to account for 39% of total revenue by the terminal year. There has also been a trend of increasing revenue from the healthcare segment. I ve projected it to continue at its current rate before finally stabilizing at 29% of revenues in the terminal year. 9
Manufacturing/Retail/Logistics has historically been a rather volatile revenue segment. However, as consumer confidences returns to historical levels, this segment should contribute more to total revenue. I ve projected this line item at 18% going into the future. Revenues from other segments have remained relatively stagnant in recent years. As such, I projected this line item based on historical data at 14% of total revenue going into the terminal year. Cost of Revenue Cognizant s cost of revenue includes salaries, incentive-based compensation, and stock-based compensation expense. Historically, this line item has stayed between 54% and 56% of revenues with little variation. In the last year it has increased as a percentage of revenue due to higher compensation and benefits. Company guidance suggests that this may continue into 2010 but decrease in the future. As such, I ve projected cost of revenue to be at 57% of revenue in 2010 decreasing at.50% per year before stabilizing at 54% into the terminal year. SG&A Expenses To project SG&A expenses, which include depreciation, amortization, I look at historical data as well as guidance in Cognizant s 10K report. The company expects to continue at roughly the same rate but gradually decrease into the future. Cognizant expects this due to favorable depreciation of foreign currency against the US dollar. The company s SG&A expenses have been declining in recent years due to the depreciation of the Indian rupee. I projected this line item forward at Beta To calculate Cognizant s beta, I used a 5-year monthly regression against the S&P 500. I determined that the beta is 1.235 (~1.24). The beta calculated by Yahoo! Finance is 1.18 and the one derived by MSN Money is 1.24. Therefore, I am confident that the beta I calculated is an accurate representation of Cognizant s exposure to market movements. A Hamada Beta would typically be used to separate the financial risk of a levered firm from its business risk. Because Cognizant carries no long-term debt, it was not necessary to regress such a beta. Tax Rate Looking through 5 years of data, Cognizant s effective annual tax rates have fallen between 10.3% and 16.4%. The main outlier is the tax rate of 10.3% in 2005 which resulted from a one-time benefit of approximately $12.4 million in connection with the repatriation of approximately $60 million of Indian earnings under the American Jobs Creation Act. Excluding this one-time benefit, the tax rate is 2005 was 17.0%. As such, I ve concluded that based on historical data, the tax rate will remain at approximately 10.0% into the foreseeable future. Current Assets To project current assets, which include cash, short-term investments, and accounts receivable, I looked at historical data. This line item was projected as a percentage of revenue based on past years. Current Assets have been approximately 27% of revenues so this is what I projected the line item at into the foreseeable future. 10
Current Liabilities To project current liabilities, which include accounts payable and deferred revenue, I looked at historical data. This line item was projected as a percentage of revenue based on past years. I projected current liabilities to be 19% of revenues into the foreseeable future before decreasing to 18% by the terminal year. Capital Expenditures Cognizant plans to continue investing in the construction and expansion of development and delivery centers. In recent years this line item has been gradually decreasing as a percentage of revenue. The company has stated that it expects to spend approximately $18 Million on these expenditures during 2010. Capital expenditures going into the future were projected based on historical data. Acquisitions The company hasn t provided much guidance on acquisitions aside from the claim that it will acquire suitable companies when the opportunities arise. I ve weighted acquisitions based on historical data at 1% going into the terminal year. RECOMMENDATION The Discounted Cash Flow Analysis, weighted at 70%, and the Comparables Analysis, weighed at 30%, produces an implied price of $34.92. This suggests an overvaluation of 21.85%. While I believe that there is great potential for growth in the IT Consulting and Services industry, it seems to have stagnated in recent months. We are currently overweight TECHNOLOGY and LARGE CAP in each of our portfolios. The main cause for this sharp overvaluation relates to the calculation of Net Working Capital (NWC) and, more importantly, the change in this line item. We can see that historically the firm s change in NWC has been rather high. The only year it hasn t was in 2008 when current assets less cash took a nose dive. The main reason for this Projecting current assets and liabilities at a historical percentage of revenue has less to a sharp decrease in free cash flow, which in turn has lowered my valuation. Moreover, because the company carries so much cash to operate, it means that shareholders are entitled to less free cash. It is also worth noting that Charles Schwab, Credit Suisse Research, Ned Davis Research, Argus, Reuters, and Market Edge Second Opinion all have strong buys on Cognizant with average price targets between $54 and $65. This may suggest that the market in overvaluing Cognizant, which might make it a good SHORT SELL candidate. 11
APPENDIX 1 COMPARABLES ANALYSIS Cognizant Technologies Infosys Technologies Wipro Limited Sapient Computer Sciences Corp. Weighted Average (CTSH) (INFY) (WIT) (SAPE) (CSC) Weight 0.35 0.35 0.10 0.20 100% Beta 1.24 1.38 2.08 1.45 1.02 1.4825 Price $51.09 $60.92 $23.05 $9.31 $54.58 $36.97 Shares 297,561,219 573,500,000 1,467,900,000 132,700,000 152,400,000 $581,625,000 Market Cap $15,202,402,679 $34,937,620,000 $33,835,095,000 1,235,437,000.00 $8,317,992,000 $19,581,536,000 Long Term Debt $0 $0 $369,000,000 0 $4,173,000,000 $1,135,500,000 Enterprise Value $15,201,301,679 $32,602,620,000 $33,233,095,000 $1,039,437,000 $10,193,992,000 $19,267,286,000 Revenue (ttm) $3,278,663,000 $4,663,000,000 $5,033,000,000 $667,000,000 $16,740,000,000 $6,775,750,000 EBITDA (ttm) $636,851,000 $1,475,000,000 $790,000,000 $44,000,000 $949,000,000 $814,500,000 OCF (ttm) $624,334,000 $1,409,000,000 $728,000,000 $38,712,000 $1,986,000,000 $1,040,428,000 Net Income $534,961,000 $1,281,000,000 $680,000,000 $88,000,000 $1,115,000,000 $791,000,000 Cash $1,101,000 $2,335,000,000 $971,000,000 $196,000,000 $2,297,000,000 $1,449,750,000 Multiples Weighted Average Implied Price Multiple Weights EV/Revenues 4.64 6.99 6.60 1.56 0.61 4.91 $54.14 0.35 EV/EBITDA 23.87 22.10 42.07 23.62 10.74 26.97 $57.72 0.35 EV/OCF 24.35 23.14 45.65 26.85 5.13 26.76 $56.15 0.30 Implied Price $56.00 Current Price $51.09 Undervalued 9.61% *The EV/Revenue metric has been excluded for CSC **The EV/OCF metric has been exluded for CSC 12
APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS (in thousands) 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Revenues: Financial Services 440,958 679,901 1,001,420 1,284,013 1,406,629 1,666,872 1,958,575 2,291,533 2,570,988 2,956,636 3,252,300 3,488,091 3,732,258 3,881,548 3,997,995 % of Revenue 49.78% 47.74% 46.89% 45.59% 42.90% 41.00% 41.00% 41.00% 40.00% 40.00% 40.00% 39.00% 39.00% 39.00% 39.00% Healthcare 176,102 330,860 504,504 688,224 860,427 1,097,696 1,289,793 1,509,058 1,799,691 2,069,645 2,276,610 2,593,709 2,775,269 2,886,279 2,972,868 % of Revenue 19.88% 23.23% 23.62% 24.44% 26.24% 27.00% 27.00% 27.00% 28.00% 28.00% 28.00% 29.00% 29.00% 29.00% 29.00% Manufacturing/Retail/Logistics 152,536 209,703 320,116 443,236 564,917 731,798 859,862 1,006,039 1,156,945 1,330,486 1,463,535 1,609,888 1,722,581 1,791,484 1,845,228 % of Revenue 17.22% 14.72% 14.99% 15.74% 17.23% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% Other 116,234 203,803 309,537 400,831 446,690 569,176 668,782 782,475 899,846 1,034,823 1,138,305 1,252,135 1,339,785 1,393,376 1,435,178 % of Revenue 13.12% 14.31% 14.49% 14.23% 13.62% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% Total Revenue 885,830 1,424,267 2,135,577 2,816,304 3,278,663 4,065,542 4,777,012 5,589,104 6,427,470 7,391,590 8,130,749 8,943,824 9,569,892 9,952,687 10,251,268 % Growth 60.78% 49.94% 31.88% 16.42% 24.00% 17.50% 17.00% 15.00% 15.00% 10.00% 10.00% 7.00% 4.00% 3.00% Total Cost of Revenue 479,915 787,923 1,206,035 1,572,816 1,849,443 2,317,359 2,699,012 3,129,898 3,567,246 4,065,375 4,431,258 4,829,665 5,167,742 5,374,451 5,535,685 % of Revenue 54.18% 55.32% 56.47% 55.85% 56.41% 57.00% 56.50% 56.00% 55.50% 55.00% 54.50% 54.00% 54.00% 54.00% 54.00% Gross Profit 405,915 636,344 929,542 1,243,488 1,429,220 1,748,183 2,078,000 2,459,206 2,860,224 3,326,216 3,699,491 4,114,159 4,402,150 4,578,236 4,715,583 Gross Margin 45.82% 44.68% 43.53% 44.15% 43.59% 43.00% 43.50% 44.00% 44.50% 45.00% 45.50% 46.00% 46.00% 46.00% 46.00% Operating Expenses: SG&A Expenses 206,899 343,238 494,102 652,021 721,359 914,747 1,050,943 1,229,603 1,414,043 1,626,150 1,788,765 1,967,641 2,105,376 2,189,591 2,255,279 % of Revenue 23.36% 24.10% 23.14% 23.15% 22.00% 22.50% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% Depreciation and Amortization 21,400 34,163 53,918 74,797 89,371 101,639 119,425 139,728 160,687 184,790 203,269 223,596 239,247 248,817 256,282 % of Revenue 2.42% 2.40% 2.52% 2.66% 2.73% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Total Operating Expenses 228,299 377,401 548,020 726,818 810,730 1,016,386 1,170,368 1,369,330 1,574,730 1,810,940 1,992,034 2,191,237 2,344,623 2,438,408 2,511,561 % of Revenue 25.77% 26.50% 25.66% 25.81% 24.73% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% Operating Income (Loss) 177,616 258,943 381,522 516,670 618,490 731,798 907,632 1,089,875 1,285,494 1,515,276 1,707,457 1,922,922 2,057,527 2,139,828 2,204,023 Operating Margin 20.05% 18.18% 17.87% 18.35% 18.86% 18.00% 19.00% 19.50% 20.00% 20.50% 21.00% 21.50% 21.50% 21.50% 21.50% Non-Operating Items Interest Income 8,982.00 17,615.00 29,560.00 22,188.00 15,895.00 20327.71 0 0 0 0 0 0 0 0 0 % of Revenue 1.01% 1.24% 1.38% 0.79% 0.48% 0.50% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Income (expense), net (1,326.00) 1,253.00 3,274.00 (23,648.00) 2,566.00 0 0 0 0 0 0 0 0 0 0 % of Revenue -0.15% 0.09% 0.15% -0.84% 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Income before taxes 185,272 277,811 414,356 515,210 636,951 752,125 907,632 1,089,875 1,285,494 1,515,276 1,707,457 1,922,922 2,057,527 2,139,828 2,204,023 % of Revenue 20.92% 19.51% 19.40% 18.29% 19.43% 18.50% 19.00% 19.50% 20.00% 20.50% 21.00% 21.50% 21.50% 21.50% 21.50% Income Tax Provision 19,006 45,016 64,223 84,365 101,988 120,340 145,221 174,380 205,679 242,444 273,193 307,668 329,204 342,372 352,644 Tax Rate 10.26% 16.20% 15.50% 16.37% 16.01% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% Net Income 166,266 232,795 350,133 430,845 534,963 631,785 762,411 915,495 1,079,815 1,272,832 1,434,264 1,615,255 1,728,322 1,797,455 1,851,379 Net Margin 18.77% 16.34% 16.40% 15.30% 16.32% 15.54% 15.96% 16.38% 16.80% 17.22% 17.64% 18.06% 18.06% 18.06% 18.06% Add Back: Interest Expense * (1-TR) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Add Back: Depreciation/Amort. 21,400 34,163 53,918 74,797 89,371 101,639 119,425 139,728 160,687 184,790 203,269 223,596 239,247 248,817 256,282 Operating Cash Flow 187,666 266,958 404,051 505,642 624,334 733,424 881,836 1,055,223 1,240,502 1,457,622 1,637,533 1,838,850 1,967,570 2,046,273 2,107,661 Current Assets 663,423 1,040,391 1,242,179 1,468,119 2,307,468 % of Revenue 74.89% 73.05% 58.17% 52.13% 70.38% Cash and Cash Equivalents 197,000 266,000 340,000 735,000 1,101,000 % of Revenue 22.24% 18.68% 15.92% 26.10% 33.58% Current Assets Less Cash 466,423 774,391 902,179 733,119 1,206,468 1,422,940 1,671,954 1,956,186 2,249,614 2,587,057 2,845,762 3,130,338 3,349,462 3,483,441 3,587,944 % of Revenue 52.65% 54.37% 42.25% 26.03% 36.80% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% Current Liabilities 155,748 249,503 340,684 387,577 646,608 772,453 907,632 1,061,930 1,221,219 1,404,402 1,544,842 1,699,327 1,818,279 1,891,011 1,947,741 % of Revenue 17.58% 17.52% 15.95% 13.76% 19.72% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% Net Working Capital 310,675 524,888 561,495 345,542 559,860 650,487 764,322 894,257 1,028,395 1,182,654 1,300,920 1,431,012 1,531,183 1,592,430 1,640,203 % of Revenue 35.07% 36.85% 26.29% 12.27% 17.08% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% Change in NWC 214,213 36,607-215,953 214,318 90,627 113,835 129,935 134,138 154,259 118,265 130,092 100,171 61,247 47,773 Subtract: Capital Expenditures 71,770 104,734 182,467 169,410 76,639 182,949 238,851 279,455 321,373 369,580 406,537 447,191 478,495 497,634 512,563 % of Revenue 8.10% 7.35% 8.54% 6.02% 2.34% 4.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Subtract Acquisitions 19,811 14,773 146,820 20,956 68,613 60,983 47,770 55,891 64,275 73,916 81,307 89,438 95,699 99,527 102,513 % of Revenue 2.24% 1.04% 6.87% 0.74% 2.09% 1.50% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Free Cash Flow 96,085-66,762 38,157 531,229 264,764 398,865 481,381 589,942 720,715 859,867 1,031,422 1,172,129 1,293,205 1,387,864 1,444,812 Present Value of Free Cash Flow 354,326 379,877 413,563 448,821 475,683 506,875 511,701 501,518 478,127 442,165 13
APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Tax Rate 16% Terminal Growth Rate 3% Risk-free Rate 3.89% Terminal Value $15,550,220 Beta 1.24 PV Terminal $4,758,936 Market Risk Premium 7.00% Sum of PV Free Cash Flow $4,530,713 % Equity 100.00% Long Term Debt $0 % Debt 0.00% Firm Value $10,389,649 CAPM (requity) 12.57% Equity Value $10,389,649 WACC 12.57% Shares Outstanding (in thousands) 297,560 Cost of Debt (rdebt) 6.00% Implied Price $34.92 Market Cap (in thousands) $15,119,024 Current Price $50.81 Cash $1,100,000 Undervaluation -31.28% Comps Implied Price $56.00 DCF Implied Price $34.92 Current Price $52.77 Weighted Average Price $41.24 Undervaluation -21.85% APPENDIX 4 BETA SENSITIVITY ANALYSIS Beta Standard Deviation Implied Price Undervalued 1.26 3σ 34.69-34.27% 1.26 2σ 34.69-34.27% 1.25 1σ 34.80-34.05% 1.24 34.92-33.83% 1.23-1σ 35.03-33.61% 1.22-2σ 35.15-33.39% 1.21-3σ 35.27-33.16% CAPM WACC PV of Terminal Value Equity Value 12.71% 12.71% 4,691,100 10,321,813 12.71% 12.71% 4,691,100 10,321,813 12.64% 12.64% 4,724,775 10,355,488 12.57% 12.57% 4,758,936 10,389,649 12.50% 12.50% 4,793,595 10,424,308 12.43% 12.43% 4,828,763 10,459,476 12.36% 12.36% 4,864,450 10,495,163 14
APPENDIX 5 MERGER, ACQUISITION, AND JOINT VENTURE ACTIVITY The following is a list of past merger, acquisition, and joint venture activity in recent years: Company Industry Date Action Cost (Approximate) Fathom Solutions, LLC. IT Consulting April, 2005 Acquisition of all Assets $35,000,000 AimNet Solutions Inc. Professional Services September, 2006 Acquisition of all Assets $15,000,000 marketrx, Inc. Life Sciences November, 2007 Acquisition of all Assets $135,000,000 Strategic Vision Consulting, Inc. IT Consulting June, 2008 Acquisition of all Assets $12,000,000 UBS India Service Center LTD. IT Infrastructure + Banking December, 2009 Acquisition of all Assets $75,000,000 Invensys Rail Railway Communications Solutions December, 2009 Global Project / R&D Agreement N/A (No Initial Cash Consideration) APPENDIX 6 SOURCES Securities Exchange Commission (SEC): www.sec.gov International Data Corporation (IDC): www.idc.com Standard and Poors (S&P): www.standardandpoors.com Yahoo! Finance: www.finance.yahoo.com Charles Schwab: www.schwab.com Market Edge Second Opinion Argus 12 Month Rating Reuters Research Credit Suisse IbisWorld Factset 15