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Cognizant (CTSH) Q2 Earnings Beat, Revenues Increase Y/Y

Zacks Equity Research

Cognizant Technology Solutions CTSH reported second-quarter 2019 non-GAAP earnings of 94 cents per share that beat the Zacks Consensus Estimate by a penny. However, the figure decreased 10.5% from the year-ago quarter.

Revenues of $4.14 billion also surpassed the consensus mark of $4.13 billion. The figure improved 4.7% at constant currency (cc) year over year.

Shares were up 3.7% in after-hour trading following the second-quarter results.

Quarter Details

Segment-wise, Financial services (35.6% of revenues), which includes insurance, banking and transaction processing, grew 1.7% on a year-over-year basis at cc to $1.47 billion. Growth was driven by contribution from the previously-announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform. However, softness continued with the company’s largest banking and insurance clients.

Healthcare (27.4% of revenues) declined 1.5% year over year at cc to $1.13 billion. The downside resulted from the ongoing industry consolidation, which reduced spending and sped up the shift of work to a captive of a large North American client.
 

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise

 

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise

Cognizant Technology Solutions Corporation price-consensus-eps-surprise-chart | Cognizant Technology Solutions Corporation Quote

 

However, Life Sciences delivered double-digit growth, driven by large enterprise deals. The company witnessed good traction with digital operation services, pharmacovigilance cases globally and momentum in the shared investigator portal for clinical trials.

Products and Resources (22.4% of revenues) continued the momentum and improved 12.3% year over year at cc to $927 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 drove segment revenues.

In July 2019, Cognizant completed the acquisition of Zenith Technologies, expanding its IoT portfolio. This will enable the company to become a single-source provider of end-to-end smart factory capabilities.

Communications, Media and Technology revenues (14.7% of revenues) were $607 million, up 14.1% from the year-ago quarter at cc. Notably, lower spending by a few large clients hurt the segment’s top-line growth.

Technology delivered double-digit growth, driven primarily by Cognizant’s digital engineering and digital content services and solutions.

Digital revenues grew in the mid-20% range on a year-over-year basis and accounted for almost 35% of total revenues in the reported quarter.

Further, Consulting & Technology services accounted for 58.9% of revenues. Outsourcing services contributed 41.1% of revenues. Additionally, roughly 35.7% of Cognizant’s revenues were from fixed-price contracts.

Region-wise, revenues from North America increased 2.3% year over year at cc and represented 75.8% of total revenues.

Revenues from Europe increased 14.2% from the year-ago quarter at cc and accounted for 18.1% of total revenues. Revenues from the U.K. increased 9.6% at cc. Rest of Europe revenues increased 18% at cc.

Rest of the World revenues rose 6.4% at cc and represented 6.1% of total revenues. Asia Pacific continued to be negatively impacted by lower spending from certain large banking customers. The company witnessed double-digit growth in insurance, manufacturing and logistics, and Life Sciences clients in the region.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, contracted 150 basis points (bps) from the year-ago quarter to 18.5%.

Headcount increased 7% year over year. Quarterly annualized attrition was 23%, flat year over year but up from 19% reported in the previous quarter.

Cognizant reported non-GAAP operating margin of 16.1%, which shrank 310 bps from the year-ago quarter.

Balance Sheet

As of Jun 30, 2019, cash and cash equivalents (and short-term investments) were $3 billion, down from $3.67 billion as of Mar 31, 2019.

Cognizant generated $575 million in cash from operations compared with $269 million reported in the previous quarter.

Free cash flow was $479 million compared with $163 million reported in the previous quarter.

Cognizant bought back 18.7 million shares in the second quarter. It has $738 million remaining under its current share repurchase authorization.

Cognizant declared a quarterly cash dividend of 20 cents per share payable on Aug 30, 2019.

Guidance

For the third quarter of 2019, Cognizant expects revenues to grow between 3.8% and 4.8% at cc to $4.23-$4.27 billion. The Zacks Consensus Estimate for revenues is currently pegged at $4.20 billion that indicates growth of 3% from the year-ago quarter’s reported figure.

Management expects overall spending in banking to remain sluggish during the second half of the year due to weakness in capital markets, increased acquisition activities with the U.S. regional banks and weak macro factors.

Moreover, Cognizant expects sluggishness in the year-over-year growth rate of the technology vertical in the rest of 2019 to be partially offset by improvements in Communications and Media segment revenues.

For 2019, revenues are projected to grow between 3.9% and 4.9% year over year at cc (revised from the earlier guidance of 3.6-5.1% year-over-year growth at cc). The consensus mark for revenues is currently pegged at $16.68 billion that indicates year-over-year growth of 3.5%.

Adjusted operating margin for the third and fourth quarters of 2019 is expected to be 18% each. For 2019, adjusted operating margin is still expected to be roughly 17%. The company expects to align the cost structure with revised revenue expectations.

Moreover, simplification of organization structure is expected to result in $65 million of annualized savings. Approximately half of that is anticipated to be realized in the remainder of 2019.

However, management expects to incur an additional $48 million of compensation-related costs during the remainder of 2019 related to the talent retention program.

Non-GAAP earnings are projected to between $3.92 and $3.98 per share (up from the previous guidance of $3.87-$3.95).

The Zacks Consensus Estimate for 2019 earnings is currently pegged at $3.91 per share.

Zacks Rank & Stocks to Consider

Cognizant currently has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector include Digital Turbine APPS, CACI International CACI and Cisco Systems CSCO. All three stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Digital Turbine is set to release quarterly results on Aug 5, both CACI International and Cisco Systems are scheduled to report on Aug 14.

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