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Cognizant's 1Q Earnings Beat Estimates

Zacks Equity Research

Leading IT services provider Cognizant Technology Solutions Corp. (CTSH) reported earnings of 95 cents per share that beat the Zacks Consensus Estimate by 3 cents.

Earnings per share jumped 20.3% year over year and 3.3% sequentially in the reported quarter. The strong growth was primarily driven by an improving top line.


Revenues jumped 18.1% year over year and 3.7% sequentially to $2.02 billion, in line with the Zacks Consensus Estimate.  The strong year-over-year growth was primarily driven by solid performance across all the segments.

First quarter revenues included $8.2 million from the acquisition of C1 Group.

Financial services (42.3% of revenues) that include insurance, banking, and transaction processing grew 4.9% sequentially and 23.1% year over year to $855.3 million.

Healthcare (25.2% of revenues) reported sequential growth of 2.0% and year-over-year growth of 9.1% to reach $510.0 million in the quarter.

Retail/manufacturing/logistics (21.1% of total revenue) continued to post strong growth in the quarter. Revenues jumped 27.2% year over year and 4.2% quarter over quarter to $425.8 million.

Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $229.5 million, up 7.0% from the year-ago quarter and 2.5% from the prior quarter.

Region wise, revenues from North America increased 16.3% year over year and 3.0% sequentially to $1.58 billion, representing 78.3% of total revenue.

Europe contributed 17.2% of total revenue, which surged 22.7% year over year and 6.7% quarter over quarter to $348.3 million.

The remaining 4.5% of total revenue came from the Rest of the World as sales jumped 35.4% from the year-ago quarter and 4.8% from the previous quarter to $90.3 million.


Selling, general & administrative expense as a percentage of revenues declined 20 basis points (“bps”) from the year-ago quarter and 150 bps from the previous quarter to 20.4%.

Depreciation & amortization (D&A) as a percentage of revenues climbed 10 bps from the year-ago quarter but remained flat on a sequential basis.

Operating margin (including stock-based compensation) climbed 10 bps from the year-ago quarter but contracted 50 bps sequentially to 18.4%.

Balance Sheet & Cash Flow

Cognizant ended the quarter with cash and cash equivalents of $1.47 billion, down from $1.57 billion at the end of the previous quarter.

Cognizant’s board of directors expanded its current share repurchase program by $500.0 million to $1.5 billion and extended the term of the program to Dec 31, 2014.


For the second quarter of 2013, Cognizant forecasts revenues of at least $2.13 billion and expects earnings of $1.06 on a non-GAAP basis.

For full year 2013, Cognizant expects revenues to increase at least 17% year over year to $8.60 billion. The company forecasts earnings of $4.31 per share for the full year.

Our Recommendation

Although Cognizant reported a better-than-expected first quarter, operating margin contraction on a sequential basis will remain a concern in the near term. Moreover, Cognizant’s full year guidance reflects sluggish revenue growth amid a volatile macro-economic environment, which may hurt profitability in the near term.

Additionally, the uncertainty surrounding the new immigration reform bill is expected to remain a major overhang on Cognizant going forward.

Nevertheless, we believe that Cognizant, which competes with the likes of Accenture (ACN), Infosys Technologies (INFY) and Wipro Ltd. (WIT), remains well diversified in key verticals and emerging markets of social, mobile, analytics and cloud, which will continue to boost its top line.

Currently, Cognizant has a Zacks Rank #3 (Hold).

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