Cognizant Technology Solutions CTSH reported second-quarter 2020 non-GAAP earnings of 82 cents per share that beat the Zacks Consensus Estimate by 20.6%. However, the figure declined 12.8% from the year-ago quarter.
Second-quarter revenues of $4 billion beat the consensus mark by 5.5%. The figure improved 5.1% year over year at constant currency (cc). Revenues across its business segments were negatively impacted by the coronavirus pandemic and the ransomware attack, primarily in the month of April.
Nonetheless, revenue and bookings improved sequentially through May and June, with increased client demand in areas such as cloud and enterprise application services, IT modernization and digital engineering.
Segment-wise, Financial services (34.9% of revenues) declined 4.3% on a year-over-year basis at cc to $1.39 billion, primarily attributed to declines in both banking and insurance. North America saw mixed trends with relatively better performance in banking, driven by regional banks.
The company witnessed continued weakness across global banking accounts and capital markets.
Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise
Cognizant Technology Solutions Corporation price-consensus-eps-surprise-chart | Cognizant Technology Solutions Corporation Quote
Healthcare (28.9% of revenues) increased 2.2% year over year at cc to $1.15 billion, driven by increased revenues from life sciences clients and the contribution of Zenith Technologies, which was acquired in July 2019.
Products and Resources (21.7% of revenues) decreased 5% year over year at cc to $867 million due to decline in retail and consumer goods, and travel and hospitality clients adversely affected by the pandemic. This was partially offset by double-digit cc growth in manufacturing, logistics, energy and utilities.
Communications, Media and Technology revenues (14.5% of revenues) were $580 million, down 3.2% from the year-ago quarter at cc, hurt by the company’s decision to exit certain portions of its content services business.
Consulting & Technology services accounted for 61.4% of revenues. Outsourcing services contributed 38.6% of revenues. Additionally, roughly 36.8% of Cognizant’s revenues were from fixed-price contracts.
Region-wise, revenues from North America decreased 4.1% year over year at cc and represented 75.2% of total revenues.
Revenues from Europe increased 0.2% from the year-ago quarter at cc and accounted for 18.3% of total revenues. Rest of the World revenues rose 9.7% at cc and represented 6.5% of total revenues.
Selling, general & administrative (SG&A) expenses, as a percentage of revenues, expanded 30 basis points (bps) from the year-ago quarter to 17.8%.
Net headcount declined approximately 2.5% year over year, including the roughly 7,000 associates exited under the Fit for Growth plan.
Quarterly annualized attrition was 24%, up 2% sequentially.
Cognizant reported non-GAAP operating margin of 14.1%, which contracted 220 bps year over year.
The company had cash and cash equivalents (and short-term investments) of $4.58 billion as of Jun 30, 2020, up from $4.28 billion as of Mar 31, 2020.
Cognizant generated $979 million in cash from operations compared with $497 million reported in the previous quarter.
Notably, the company has no significant debt maturities until 2023. As of Jun 30, 2020, the company had a long-term debt of $2.42 billion, down from $2.43 million as of Mar 31, 2020.
Free cash flow was $886 million compared with $385 million reported in the previous quarter.
Cognizant bought back 888K shares for $40 million in the second quarter.
The company declared a quarterly cash dividend of 22 cents per share on Cognizant Class A common stock for shareholders of record at the close of business on Aug 21, 2020. This dividend will be paid out on Aug 31, 2020.
Full-year 2020 revenues are expected to be in the range of $16.4-16.7 billion, or a decline on a cc basis of 0.5% to 2%.
The company expects adjusted operating margin to be around 15% in 2020.
The consensus mark for 2020 revenues is currently pegged at $16.1 billion, indicating a decline of 4% from the year-ago quarter.
Full-year 2020 adjusted earnings are expected to be in the range of $3.48-3.58 per share.
Zacks Rank & Stocks to Consider
Cognizant currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are Dropbox DBX, Everbridge EVBG and Analog Devices ADI. While both Dropbox and Everbridge sport a Zacks Rank #1 (Strong Buy), Analog Devices carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Both Dropbox and Everbridge are scheduled to report earnings on Aug 6. Analog Devices is set to release quarterly results on Aug 19.
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