Cognizant (CTSH) Q1 Earnings Beat Estimates, View Intact

Cognizant Technology Solutions Corp.’s (NASDAQ:CTSH) first-quarter 2017 adjusted earnings of 79 cents per share beat the Zacks Consensus Estimate of 75 cents. The company reported non-GAAP earnings of 84 cents a share compared with 80 cents reported in the prior-year quarter.

Revenues of $3.546 billion beat the Zacks Consensus Estimate of $3.522 billion. Also, sales grew 10.7% year over year.

Quarter Details

Segment-wise, Financial services (38.8% of revenues), that includes insurance, banking and transaction processing, grew 7% year over year to $1.376 billion. Health care (28.3% of revenues) grew 9.7% year over year to $1.003 billion.

Products and Resources (20.8% of revenues) continued its growth momentum and rose 16.4% year over year to $737 million. Communications, Media and Technology(12.1% of revenues) were $430 million, up 16.5% from the year-ago quarter.

Region-wise, revenues from North America increased 10.6% year over year and represented 77.9% of total revenue. Revenues from the U.K. declined 8.4% year over year (7.7% of the total revenues), though the Rest of Europe witnessed an increase of 26.1% in sales, which contributed 8% to total revenue. The remaining 6.4% came from the Rest of the World where revenues increased 25.6%.

Selling, general & amortization (SG&A) expense, as a percentage of revenues, improved 90 basis points (bps) from the year-ago quarter to 19.3%.

The company reported non-GAAP operating margin of 18.9%.

Balance Sheet

Cognizant exited the quarter with cash and cash equivalents (and short-term investments) of $4.274 billion, compared with $5.169 billion as of Dec 31, 2016. The company’s long-term debt was $772 million compared with $797 million as of Dec 31, 2016.

Guidance

For the second quarter of 2017, the company expects revenues in a range of $3.63–$3.68 billion. Non-GAAP earnings per share are expected to be 89 cents. The Zacks Consensus Estimate for revenues and earnings is pegged at $3.66 billion and 81 cents, respectively.

Cognizant reiterated its guidance for 2017. Revenues are now expected to be in a range of $14.56–$14.84 billion while non-GAAP earnings are likely to be $3.64 per share. The Zacks Consensus Estimate for revenues and earnings is pegged at $14.74 billion and $3.29 per share, respectively.

Our Take

Cognizant is consistently developing its capabilities to benefit from the ongoing digital transition, especially when it comes to integration of the new digital framework with legacy technology platforms. Moreover, accretive acquisitions such as the TriZetto, the more recent buyouts of Mirabeau BV, and the technology and business process services unit of Frontica Business Solutions AS are likely to benefit the company.

Over the past few years, Cognizant outpaced its Tier-1 peers on account of more exposure to the fast-growing verticals like Financial Services and Healthcare. The company has gained deep industry expertise and knowledge of the domain through partnerships with top firms. This strategy has enabled it to deliver more value to clients and capitalize on new opportunities.

However, the company has been seeing some sluggishness of late in the healthcare and financial sector, which are its biggest markets. Moreover, in such a turbulent market, the company has to constantly fend off competition from peers like Accenture (NYSE:ACN) , Infosys (NYSE:INFY) and Wipro Ltd. WIP.

Currently, Cognizant has a Zacks Rank #3 (Hold). A look at Cognizant’s price performance in the past one year shows that it has marginally outperformed the Zacks categorized Business Software Services/BPO industry. Shares are down 5.50% compared with a 5.30% gain witnessed in the overall industry.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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