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Leading IT services provider, Cognizant Technology Solutions Corp. (CTSH - Analyst Report), reported first-quarter 2014 earnings of 62 cents per share, which beat the Zacks Consensus Estimate by 7 cents and jumped 21.6% from the year-ago quarter.

Quarter Details

Revenues jumped 19.9% year over year to $2.42 billion, almost in line with the Zacks Consensus Estimate. The strong year-over-year growth was primarily driven by solid performance across all the segments.

The Financial services segment (42.3% of revenues) that includes insurance, banking and transaction processing grew 19.7% year over year to $1.02 billion. Healthcare (25.4% of revenues) reported year-over-year growth of 20.8% to reach $615.9 million in the quarter.

Retail/manufacturing/logistics (21.1% of revenues) continued to post strong growth in the quarter. Revenues jumped 20.2% year over year to $511.9 million. Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $270.8 million, up 18.0% from the year-ago quarter.

Region-wise, revenues from North America increased 16.1% year over year and represented 75.8% of total revenue. Europe contributed 19.4% to revenues, which surged 35.0% year over year in the quarter. The remaining 4.8% of revenues came from the Rest of the World as sales jumped 28.4% from the year-ago quarter to $116.0 million.

Operating margin (excluding stock-based compensation) climbed 90 basis points (bps) from the year-ago quarter to 20.8%. The better-than-expected result was primarily due to declining selling, general & administrative (SG&A), and depreciation & amortization (D&A) expenses as a percentage of revenues.

SG&A as a percentage of revenues declined 40 bps from the year-ago quarter to 20.0%. D&A expense as a percentage of revenues fell 30 bps on a year-over-year basis.

Net income margin (excluding stock-based compensation and acquisition charges) increased 30 bps from the year-ago quarter to 15.7%.

Cognizant exited the first quarter with cash and cash equivalents of $1.94 billion, significantly up from $2.21 billion at the end of the previous quarter.

Guidance

For the second quarter of 2014, revenues are expected to be in the range of $2.50 to $2.53 billion. Earnings are expected to be approximately 62 cents per share, much better than the Zacks Consensus Estimate of 57 cents.

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 $2.54 per share for the full year, much better than the Zacks Consensus Estimate of $2.34.

Our Take

We believe that 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 #3 (Hold).

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