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Why Is Cognizant (CTSH) Down 2.6% Since Last Earnings Report?

Zacks Equity Research
·5 mins read

It has been about a month since the last earnings report for Cognizant (CTSH). Shares have lost about 2.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cognizant due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Cognizant Q2 Earnings Beat, Revenues Rise Y/Y

Cognizant Technology Solutions 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). However, 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.

Quarter Details

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.

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.

Operating Details

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.

Balance Sheet

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.

Guidance

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.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 9.11% due to these changes.

VGM Scores

At this time, Cognizant has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Cognizant has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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