Cognizant (CTSH) Up 1.6% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Cognizant (CTSH). Shares have added about 1.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Cognizant due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Cognizant Q2 Earnings Beat Estimates, Revenues Down Y/Y
Cognizant Technology Solutions reported second-quarter 2023 non-GAAP earnings of $1.10 per share, which beat the Zacks Consensus Estimate by 13.4% but decreased 3.5% year over year.
Revenues of $4.89 billion beat the consensus mark by 1.5%. However, the top line decreased 0.4% year over year and 0.1% at constant currency (cc). On a sequential basis, revenues increased more than 1%.
Acquisitions contributed 130 basis points (bps) to top-line growth.
Bookings increased 17% year over year, which benefited from mix-shift towards larger deals. Cognizant continued to witness weakness in smaller, shorter-duration contracts, primarily due to sluggish discretionary spending.
On a trailing twelve-month basis, bookings increased 14% year over year to $26.4 billion, which represented a book-to-bill of approximately 1.4 times.
Top-Line Details
Financial services revenues (29.9% of revenues) decreased 4.8% year over year at cc to $1.46 billion. The decline was attributed to a challenging demand environment and weakness in discretionary spending.
Financial services revenues missed the Zacks Consensus Estimate by 1.41%.
Health Sciences revenues (29.5% of revenues) increased 2.1% year over year at cc to $1.44 billion. Strong demand for integrated software solutions (up mid-teens year over year) drove growth.
Health Sciences revenues beat the consensus mark by 0.61%.
Products and Resources revenues (24.1% of revenues) increased 3.7% year over year at cc to $1.18 billion and beat the Zacks Consensus Estimate by 4.05%. Continued strength among automotive, travel and hospitality customers benefited the segment’s top-line growth.
Communications, Media and Technology revenues (16.5% of revenues) were $806 million, which declined 0.4% from the year-ago quarter at cc but beat the consensus mark by 0.51%.
Region-wise, revenues from North America decreased 1.7% year over year at cc and accounted for 73.5% of total revenues. The decline was primarily attributed to weakness in Financial Services, as well as the Communications, Media and Technology segment.
Revenues from Europe increased 6.3% from the year-ago quarter at cc and made up 19.8% of total revenues. Revenues from the U.K. and Continental Europe increased 3.3% and 9.5% year over year at cc, respectively.
The Rest of the World revenues were flat at cc and represented 6.8% of total revenues.
Operating Details
Selling, general & administrative expenses, as a percentage of revenues, decreased 100 bps year over year to 17%.
Total headcount at the end of the second quarter was 345,600, down 5,900 sequentially but up 4,300 year over year.
Voluntary attrition – Tech Services, on a trailing 12-month basis, declined to 19.9% from 23.1% in the first quarter of 2023 and 31.1% in the second quarter of 2022.
Cognizant reported a non-GAAP operating margin of 14.2%, which contracted 130 bps year over year.
The company incurred $117 million in costs related to the NextGen program, negatively impacting GAAP operating margin by 240 bps.
Key Q2 Developments
Cognizant strengthened its partner base in the reported quarter. It expanded its partnership with Gilead Sciences, ServiceNow, Alphabet’s division Google Cloud, AT&T and Orkla. Cognizant also inked new partnerships with Microsoft subsidiary Nuance Communications and Accuray.
The partnership with Gilead Sciences is valued at $800 million over the next five years. Per the renewed and expanded partnership, Cognizant will manage Gilead’s global IT infrastructure, platforms, applications and advanced analytics, and lead initiatives designed to accelerate its digital transformation, leveraging the power of generative AI.
The expanded partnership with ServiceNow aims to improve AI-driven automation across industries. Cognizant’s newly formed ServiceNow Business Group will offer AI-based solutions that will solve complex problems, automate operations, and enhance employee and end-customer experiences.
Moreover, as a part of its expanding alliance with Google Cloud, Cognizant will open new Google Cloud AI innovation centers in Bangalore, London and San Francisco to support a new Cognizant Google Cloud AI University to train 25,000 Cognizant associates and clients.
Cognizant will help the Microsoft subsidiary Nuance to develop Dragon Ambient eXperience Operations. For Accuray, the company will support its deployment of SAP S/4HANA to obtain better data and analytics and achieve greater business efficiencies.
Moreover, Cognizant launched a new business group, Cognizant Ocean, to help support ocean industries or the “Blue Economy,” leveraging digital technologies, including AI and data analytics.
Blue Economy companies encompass a broad range of sectors, including shipping, marine transportation, offshore oil and gas, marine renewables, aquaculture and marine conservation. These companies are facing challenges related to sustainability, environmental impact and climate change.
Cognizant Ocean will help Blue Economy companies to be more sustainable and efficient. Apart from improving business outcomes, Cognizant will help reduce their carbon output and decarbonize the oceans.
The company also announced a partnership with Tidal, a project inside X, Alphabet’s Moonshot Factory. Under the collaboration, Tidal’s ocean information platform will be widely available to the aquaculture market. Tidal leverages innovation in underwater perception, machine learning, AI and automation to gather and analyze data.
Balance Sheet
Cognizant had cash and short-term investments of $2.1 billion as of Jun 30, 2023 compared with $2.48 billion as of Mar 31, 2023.
As of Jun 30, 2023, the company had a total debt of $793 million, up from $646 million reported as of Mar 31, 2023.
It generated $36 million in cash from operations compared with $729 million in the previous quarter.
Free cash outflow was $32 million against free cash flow of $631 million reported in the prior quarter. Free cash flow was negatively impacted by tax payments of approximately $300 million related to 2022.
In the second quarter of 2023, the company returned $200 million through share repurchases. As of Jun 30, 2023, it had $2.4 billion remaining under the current share repurchase program.
Guidance
Cognizant expects third-quarter 2023 revenues between $4.89 billion and $4.94 billion, indicating a decline of 0.5% to an increase of 0.5% on a cc basis. Favorable forex is expected to aid the top line by 110 bps while acquisitions are expected to contribute 100 bps.
In the Financial Services segment, Cognizant continues to expect the challenging macro environment to hurt spending rates, thereby negatively impacting top-line growth.
Cognizant expects the Communications, Media and Technology segment to improve in the third quarter of 2023, due to ramping up of new bookings.
However, it expects a softer fourth quarter than usual due to weak and sluggish discretionary spending.
For 2023, revenues are expected to be $19.2-$19.6 billion, indicating a decline of 1% to growth of 1% at cc. Adjusted operating margin for 2023 is expected between 14.2% and 14.7%. Adjusted earnings for 2023 are expected between $4.25 and $4.44 per share.
The company anticipates interest income of $115 million in 2023. Moreover, Cognizant now expects to incur $350 million in NextGen charges, out of which, $250 million will be recognized in 2023.
Cognizant still expects to return $1.4 billion to shareholders through share repurchases and regular quarterly dividends.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
VGM Scores
At this time, Cognizant has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Cognizant has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Cognizant is part of the Zacks Business - Software Services industry. Over the past month, Tyler Technologies (TYL), a stock from the same industry, has gained 4.1%. The company reported its results for the quarter ended June 2023 more than a month ago.
Tyler Technologies reported revenues of $504.28 million in the last reported quarter, representing a year-over-year change of +7.6%. EPS of $2.01 for the same period compares with $1.88 a year ago.
For the current quarter, Tyler Technologies is expected to post earnings of $1.97 per share, indicating a change of -4.4% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.3% over the last 30 days.
Tyler Technologies has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.
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