Cognizant Beats by a Penny

Zacks

Leading IT services provider Cognizant Technology Solutions Corp. (CTSH) reported earnings of 92 cents that beat the Zacks Consensus Estimate by a penny.  Earnings per share (“EPS”) jumped 17.9% year over year and 1.1% sequentially in the reported quarter. The strong growth was primarily driven by an improving top line.

Quarter Details

Revenues jumped 17.1% year over year and 3.0% sequentially to $1.95 billion, in line with the Zacks Consensus Estimate. The strong year-over-year growth was primarily driven by solid performance across all the segments.

Financial services (41.9% of total revenues) that include insurance, banking, and transaction processing grew 3.4% sequentially and 19.9% year over year to $815.4 million. Healthcare (25.7% of total revenue) reported sequential growth of 3.5% and year-over-year growth of 9.4% and reached $500.1 million in the quarter.

Retail/manufacturing/logistics (21% of total revenue) continued to post strong growth in the quarter. Revenues jumped 28.2% year over year and 3.1% quarter over quarter to $408.7 million. Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $224.0 million, up 7.7% from the year-ago quarter and almost flat on a sequential basis.

Region wise, revenues from North America increased 15.7% year over year and 2.1% sequentially to $1.54 billion, representing 78.8% of total revenues. Europe contributed 16.8% of total revenues, which surged 19.0% year over year and 7.8% quarter over quarter to $326.2 million. The remaining 4.4% of total revenues came from the Rest of the World as sales jumped 38.4% from the year-ago quarter and 2.1% from the previous quarter to $86.1 million.

Operating margin (including stock-based compensation) came in at 18.3% versus 18.8% in the previous quarter and 18.5% in the year-ago quarter. The contraction in operating margin was primarily due to 20 basis points expansion in operating expenses as a percentage of revenues. 

Cognizant ended the quarter with cash and cash equivalents of $1.57 billion, up from $1.30 billion at the end of the previous quarter.

Guidance

For first quarter of 2013, Cognizant forecasts revenues of at least $2.0 billion and expects EPS of $1.01. Cognizant expects revenues to increase 17% year over year to at least $8.60 billion that includes $90.0 million from acquisitions. The company forecasts EPS of $4.31 for the full year.

Our Recommendation

Although Cognizant reported a better-than-expected fourth quarter, operating margin contraction will remain a concern going forward. Moreover, Cognizant’s full year guidance reflects sluggish revenue growth amid a volatile macro-economic environment, which may hurt profitability in the near term.

Nevertheless, we believe that Cognizant, which competes with the likes of Accenture (ACN), Infosys Technologies (INFY) and Wipro Ltd. (WIT), remains well diversified in key verticals such as financial services, health care & life sciences, retail, manufacturing and logistics, which will continue to boost its top line.

Currently, Cognizant has a Zacks Rank #3 (Hold).

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