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Cognizant (CTSH) Q4 Earnings: Is a Disappointment in Store?

Zacks Equity Research

Cognizant Technology Solutions Corp CTSH is set to report fourth-quarter 2018 results on Feb 6.

The company’s earnings have beaten the Zacks Consensus Estimate in all of the trailing four quarters, delivering average positive surprise of 5.2%.

In the last reported quarter, Cognizant’s non-GAAP earnings of $1.19 per share beat the Zacks Consensus Estimate by six cents and increased 21.4% from the year-ago quarter.

However, the company’s top line has lagged the consensus mark in three of the trailing four quarters. In third-quarter 2018, revenues came in at $4.078 billion, missing the Zacks Consensus Estimate of $4.084 billion but increasing 8.3% from the year-ago quarter.

For fourth-quarter 2018, Cognizant expects revenues of $4.09-$4.13 billion. Non-GAAP earnings are expected to be at least $1.05 per share.

The Zacks Consensus Estimate for fourth-quarter earnings has increased 2.9% over the past 30 days to $1.07. Moreover, the consensus mark for revenues is currently pegged at $4.11 billion, which reflects year-over-year growth of 7.5%.

Cognizant Technology Solutions Corporation Price and EPS Surprise

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


Let’s see how things are shaping up for this announcement.

Banking Weakness to Hurt Results

Lackluster spending by large banks in the financial services sector is expected to dent Cognizant’s fourth-quarter results.

In the last reported quarter, Financial services (35.9% of revenues), which includes insurance, banking and transaction processing, grew 2.6% year over year to $1.46 billion. The company witnessed modest growth in both banking and insurance.

Notably, growth attributable to the top five banking clients declined 11.8% in the trailing 12 months (ending Sep 30, 2018), per Cognizant’s Analyst Day presentation. However, digital expansion helped Cognizant to regain some momentum at two of the five large banking clients in the third quarter.

Acquisitions Driving Domain Expertise

Cognizant is gaining from steady demand across payer clients and increasing interest in the company’s digital, analytics, cloud and virtualization solutions. The company is continuously developing its capabilities to gain from the ongoing digital transition, especially from the integration of the new digital framework with legacy technology platforms.

The company’s strategic customer base (clients with the potential to generate $5-$50 million or more in annual revenues) continues to expand. At the end of third-quarter 2018, Cognizant had 378 strategic clients.

Acquisitions of Adaptra, TriZetto, Bolder Healthcare, Mirabeau BV, and the technology and business process services unit of Frontica Business Solutions AS are benefiting the company. Moreover, Netcentric and Mirabeau acquisitions strengthened Cognizant’s digital leadership in Europe. Outsourcing growth benefited from the acquisition of Bolder Healthcare.

The acquisition of Advanced Technology Group (ATG), which has deep Quote-to-Cash (Q2C) domain expertise and offers extensive Salesforce based CPQ and Billing solutions, strengthens Cognizant’s cloud solutions portfolio.

Moreover, the acquisition of privately-held consulting firm, SaaSfocus expands Cognizant’s end-to-end digital transformation services in the Asia-Pacific (APAC) region, particularly Australia and India. Notably, SaaSfocus is one of the largest independent Salesforce Platinum consulting partners in this fast growing region.

During fourth-quarter 2018, Cognizant announced the acquisition of Brooklyn, NY-based Mustache, a privately-held creative content agency.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Cognizant has a Zacks Rank #4 but its Earnings ESP is +0.94%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are some companies, which, per our model, have the right combination of elements to post earnings beat this quarter:

Twitter TWTR has an Earnings ESP of +13.03% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Square SQ has an Earnings ESP of +6.06% and a Zacks Rank #2.

Vipshop Holdings VIPS has an Earnings ESP of +5.26% and a Zacks Rank #2.

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