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Cognizant (CTSH) Misses on Q1 Earnings, Cuts 2019 Guidance

Zacks Equity Research

Cognizant Technology Solutions CTSH reported first-quarter 2019 non-GAAP earnings of 91 cents per share that missed the Zacks Consensus Estimate of $1.03. The figure also decreased 3.2% from the year-ago quarter.

GAAP earnings were negatively impacted by a $117 million accrual related to a recent ruling of the Supreme Court of India interpreting certain statutory defined contribution obligations of employees and employers. The ruling has altered the historical understanding of such obligations by extending it to cover additional portions of an employee's income.

Revenues of $4.11 billion also lagged the consensus mark of $4.17 billion. The figure however improved 6.8% at constant currency (cc) year over year.

Cognizant slashed its 2019 guidance indicating slower growth expectations from Financial Services and Healthcare in the rest of the year.
 

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise | Cognizant Technology Solutions Corporation Quote

 

Quarter Details

Segment-wise, Financial services (34.9% of revenues), which includes insurance, banking and transaction processing, grew 0.2% year over year at cc to $1.44 billion. Growth was negatively impacted by in-sourcing and sluggishness at some of the company’s largest banking clients and several insurance and North American regional banking clients.

Healthcare (28.3% of revenues) grew 4.6% year over year at cc to $1.17 billion. Growth was hurt by continuing industry consolidation that reduced spending and accelerated movement of some work to captive at a large North American client. However, Life Sciences delivered above company average growth, driven by large enterprise deals.

Products and Resources (22.2% of revenues) continued its growth momentum and improved 13.8% year over year at cc to $914 million, driven by growth in retail and consumer goods, travel and hospitality, and manufacturing, logistics, energy and utilities.

Cognizant stated that continued strength in cloud and digital engineering services and increased demand for interactive, IoT and analytics solutions across clients drove segment revenue growth.

Communications, Media and Technology (14.5% of revenues) were $595 million, up 19.6% from the year-ago quarter at cc. Technology delivered double-digit growth driven primarily by Cognizant’s digital content solutions.

Digital revenues grew more than 25% on a year-over-year basis and accounted for one-third of total revenues in the reported quarter.

Further, Consulting & Technology services accounted for 58.6% of revenues. Moreover, outsourcing services contributed 41.4% of revenues. Additionally, roughly 35.7% of Cognizant’s revenues were from fixed price contracts.

Region-wise, revenues from North America increased 5% year over year at cc and represented 76.1% of total revenues.

Revenues from Europe increased 14.3% from the year-ago quarter at cc and accounted for 17.9% of total revenues. Revenues from the United Kingdom increased 12.1% at cc and accounted for 8% of total revenues. Rest of Europe revenues increased 16.2% at cc and accounted for 9.9% of total revenues.

Rest of the World revenues rose 7.1% at cc and represented 6.2% of total revenues. Asia Pacific continued to be negatively impacted by lower spending from certain large banking customers.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, increased 310 basis points (bps) from the year-ago quarter to 21.2%.

Headcount increased 1.5% sequentially and 9.3% year over year. Quarterly annualized attrition was 19%, down 1% year over year.

Cognizant reported non-GAAP operating margin of 16%, which contracted 170 bps from the year-ago quarter.

Balance Sheet

As of Mar 31, 2019, cash and cash equivalents (and short-term investments) were $3.67 billion, down from $4.51 billion as of Dec 31, 2018.

Cognizant generated $269 million in cash from operations. Free cash flow was $163 million.

During the reported quarter, Cognizant completed Mustache and Meritsoft acquisitions.

The company bought back 9.5 million shares in the reported quarter. Cognizant has $1.78 billion remaining under current share repurchase authorization.

Cognizant declared a quarterly cash dividend of 20 cents per share payable on May 31, 2019.

Guidance

For the second quarter of 2019, Cognizant expects revenues to grow between 3.9% and 4.9% at cc. The Zacks Consensus Estimate for revenues is currently pegged at $4.30 billion that indicates year-over-year growth of 7.3%.

Adjusted operating margin for the second-quarter is expected to be flat sequentially.

For 2019, revenues are projected to grow between 3.6% and 5.1% year over year at cc (down from the earlier guidance of 7% and 9% year over year at cc). The consensus mark for revenues is currently pegged at $17.32 billion that indicates year-over-year growth of 7.4%.

Non-GAAP operating margin is expected to be roughly 17% (down from previous guidance of roughly 19%). The company expects to align cost structure with revised revenue expectations.

Moreover, as a result of the Supreme Court of India ruling, the contributions of employees and Cognizant in future periods require to be increased. This will result in roughly $15 million of incremental spending for the remainder of 2019 related to the employer portion of this contribution.

Non-GAAP earnings are projected to between $3.87 and $3.95 (down from previous guidance of at least $4.40 per share).

The Zacks Consensus Estimate for earnings is currently pegged at $4.43 per share.

Cognizant expects to increase its investments and focus on international growth, particularly Europe.

Cognizant expects to utilize almost 50% of its global free cash flow annually for dividends and share repurchases. Management expects to maintain a dividend payout ratio of roughly 20%. Moreover, the company plans to reduce outstanding share count by almost 1% annually.

Moreover, Cognizant plans to use roughly 25% of free cash flow for acquisitions.

Zacks Rank & Stocks to Consider

Cognizant currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector include Guidewire Software GWRE, Upland Software UPLD and MongoDB MDB. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While long-term earnings growth rate for Guidewire Software and MongoDB is pegged at 8%, Upland Software is expected to grow at 20%.

 

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