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Leading IT services provider, Cognizant Technology Solutions Corp. (CTSH - Analyst Report), reported fourth-quarter 2013 earnings of $1.07 per share, which beat the Zacks Consensus Estimate by a couple of cents and jumped 15.1% from the year-ago quarter.

Earnings include stock-based compensation (after-tax) expense of 8 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 21.0% year over year to $2.36 billion, which lagged the Zacks Consensus Estimate. The strong year-over-year growth was primarily driven by solid performance across all the segments.

The Financial services (42.3% of revenues) segment that includes insurance, banking and transaction processing grew 22.3% year over year to $997.1 million. Healthcare (26.0% of revenues) reported year-over-year growth of 22.6% to reach $613.3 million in the quarter.

Retail/manufacturing/logistics (20.8% of revenues) continued to post strong growth in the quarter. Revenues jumped 20.0% year over year to $490.2 million. Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $254.8 million, up 13.7% from the year-ago quarter.

Region-wise, revenues from North America increased 18.3% year over year and represented 77.2% of total revenue. Europe contributed 18.2% of total revenue, which surged 31.5% year over year in the quarter. The remaining 4.6% of revenues came from the Rest of the World as sales jumped 26.6% from the year-ago quarter to $109.0 million.

Operating margin (including stock-based compensation) climbed 70 basis points (bps) from the year-ago quarter to 19.3%. The better-than-expected result was primarily due to declining selling, general & administrative (SG&A) expense and almost flat depreciation & amortization (D&A) expense as a percentage of revenues.

SG&A as a percentage of revenues declined 150 bps from the year-ago quarter to 19.1%.

Net income margin (excluding stock-based compensation and acquisition charges) decreased 50 bps from the year-ago quarter to 13.8%. Earnings per share (excluding stock-based compensation and acquisition charges) increased 16.2% to $1.15 per share in the reported quarter.

Cognizant exited the fourth quarter with cash and cash equivalents of $2.21 billion, significantly up from $2.03 billion at the end of the previous quarter.

Cognizant’s board of directors declared a two-for-one stock split of its Class A common stock in the form of a 100% stock dividend.

Guidance

For the first quarter of 2014, revenues are expected to be at least $2.42 billion. Earnings are expected to be approximately $1.18 per share (prior to stock split), which was much better than the Zacks Consensus Estimate of $1.11.

For full-year 2014, Cognizant expects revenues to increase at least 16.5% year over year to $10.3 billion. The company forecasts earnings of $5.02 (prior to stock split) per share for the full year, much better than the Zacks Consensus Estimate of $4.73.

Recommendation

We believe Cognizant’s positive outlook will drive the stock in the near term.  Additionally, we believe 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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