Cognizant (CTSH) Q2 Earnings Beat Estimates, Sales In Line

Cognizant Technology Solutions Corp.’s (NASDAQ:CTSH) second-quarter 2016 adjusted earnings of 79 cents per share surpassed the Zacks Consensus Estimate of 73 cents. Revenues of $3.370 billion were almost in line with the consensus mark of $3.371 billion. Sales grew 9.2% year over year.

Quarter Details

Segment wise, Financial services segment (40.1% of revenues) that includes insurance, banking and transaction processing grew 8.1% year over year to $1,351.2 million. Health care (28.5% of revenues) grew 6.9% year over year to $958.8 million. Retail/manufacturing/ logistics (19.6% of revenues) continued its growth momentum and jumped 14.2% year over year to $660.4 million. Other revenues (11.9% of revenues), which includes sales from service-oriented industries like communications, media and high tech, were $399.5 million, up 11.2% from the year-ago quarter.

Region-wise, revenues from North America increased 8.3% year over year and represented 77.9% of total revenue. Europe contributed 16.2% to revenues, which increased 8.9% year over year. The remaining 5.9% came from the Rest of the World where revenues jumped 25%.

Selling, general & amortization (SG&A) expense, as a percentage of revenues, decreased 40 basis points (bps) from the year-ago quarter to 19.4%.

The company reported GAAP operating margin of 17.5% while non-GAAP operating margin was 20.3%.

Balance Sheet

Cognizant exited the quarter with cash and cash equivalents (and short-term investments) of $4.48 billion, compared with $4.95 billion as of Dec 31, 2015. The company’s long term debt was $840 million compared with $876.8 million as of Dec 31, 2015.

The company announced that it has expanded its stock repurchase program from $2.0 billion to $3.0 billion. It also extended the term of the program from Dec 31, 2017 to Dec 31, 2018.

The company has repurchased nearly $1.9 billion of its shares under this program.

Also, the company stated that "During the second quarter, we were pleased to execute a one-time remittance of $2.8 billion from India, which increased our cash in the U.S. by $1.0 billion, net of taxes, and in other international markets by $1.6 billion.” This move allows the company to have additional financial flexibility for driving growth.

Guidance

For the third quarter of 2016, the company expects revenues in a range of $3.43 billion to $3.47 billion. Non-GAAP earnings per share are expected to be in a band of 82 to 85 cents.

Cognizant reaffirmed its non-GAAP earnings expectation for 2016 in a range of $3.32 to $3.44 but lowered its revenue outlook to a range of $13.47 billion to $13.60 billion compared with the earlier projection of $13.65 billion to $14.0 billion.

The company cited macroeconomic headwinds as the reason for its lower revenue outlook.

COGNIZANT TECH Price, Consensus and EPS Surprise

COGNIZANT TECH Price, Consensus and EPS Surprise | COGNIZANT TECH Quote

Our Take

Cognizant has placed itself well to benefit from the ongoing digitization of businesses. The company already has its own platform named Digital Works, designed to aid such business transformations. Cognizant bought a 49% stake in ReD Associates, a prominent consulting firm last April. This acquisition further strengthens Digital Works’ capabilities.

Moreover, apart from being a prominent technological services provider, Cognizant has been increasing its focus on high profit areas like professional consulting and business-process outsourcing, which is a positive.

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. (V:WIP) , which is a headwind.

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

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