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Leading IT services provider Cognizant Technology Solutions Corp. (CTSH - Analyst Report) reported third quarter 2013 earnings of $1.06 per share, which beat the Zacks Consensus Estimate by a nickel and jumped 15.8% from the year-ago quarter.

Earnings include stock-based compensation (after-tax) expense of 7 cents per share but exclude an acquisition charge of a penny. The year-over-year growth was primarily driven by a robust top line.

Quarter Details

Revenues jumped 21.9% year over year to $2.31 billion, well above the Zacks Consensus Estimate. The strong year-over-year growth was primarily driven by solid performance across all the segments.

The Financial services (41.4% of revenues) segment that includes insurance, banking, and transaction processing grew 21.0% year over year to $954.4 million. Healthcare (26.0% of revenues) reported year-over-year growth of 24.2% to reach $599.9 million in the quarter.

Retail/manufacturing/logistics (21.3% of revenues) continued to post strong growth in the quarter. Revenues jumped 23.7% year over year to $490.6 million. Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $260.8 million, up 16.6% from the year-ago quarter.

Region wise, revenues from North America increased 18.5% year over year and represented 77.3% of revenues. Europe contributed 18.0% of revenues, which surged 37.0% year over year in the quarter. The remaining 4.7% of revenues came from the Rest of the World as sales jumped 28.0% from the year-ago quarter to $108.0 million.

Operating margin (including stock-based compensation) climbed 30 basis points from the year-ago quarter to 19.2%. The better-than-expected result was primarily due to declining selling, general & administrative (SG&A) expense and depreciation & amortization (D&A) expense as a percentage of revenues.

SG&A as a percentage of revenues declined 110 bps from the year-ago quarter to 19.2%. D&A as a percentage of revenues declined 30 bps from the year-ago quarter to 1.8%.

Net income margin (excluding stock-based compensation and acquisition charges) decreased 70 bps from the year-ago quarter to 13.9%. Earnings per share (excluding stock-based compensation and acquisition charges) increased 15.4% to $1.05 per share in the reported quarter.

Cognizant exited the third quarter with cash and cash equivalents of $2.03 billion, significantly up from $1.68 billion at the end of the previous quarter.

Guidance

For full year 2013, Cognizant expects revenues to increase at least 20.3% year over year to $8.84 billion (prior outlook was $8.74 billion). The company forecasts earnings of $4.01 (prior outlook was $4.32) per share for the full year.

Our Recommendation

Cognizant reported a better-than-expected third quarter and raised its full year guidance. We believe that the positive outlook will drive the stock in the near term.  Additionally, we believe that Cognizant, which competes with the likes of Accenture (ACN - Analyst Report), Infosys (INFY - Analyst Report) and Wipro Ltd. (WIT - Snapshot Report), remains well diversified in key verticals and emerging markets of social, mobile, analytics and cloud, which will continue to boost its top line.

However, increasing headcount may hurt profitability in the near-term.

Currently, Cognizant has a Zacks Rank #2 (Buy).

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