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Leading IT services provider, Cognizant Technology Solutions Corp. ((CTSH - Analyst Report)), reported second-quarter 2014 earnings of 66 cents per share, which beat the Zacks Consensus Estimate by 8 cents and increased 13.8% from the year-ago quarter.

Quarter Details

Revenues jumped 16.5% year over year to $2.52 billion, lagging the Zacks Consensus Estimate. The strong year-over-year growth was primarily driven by solid performance across all the segments.

The Financial services segment (42.1% of revenues) that includes insurance, banking and transaction processing grew 16.2% year over year to $1.06 billion. Healthcare (25.6% of revenues) reported year-over-year growth of 19.2% to reach $645.4 million in the quarter.

Retail/manufacturing/logistics (20.4% of revenues) continued to post strong growth in the quarter. Revenues jumped 11.4% year over year to $514.3 million. Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $298.8 million, up 20.8% from the year-ago quarter.

Region-wise, revenues from North America increased 15% year over year and represented 76.6% of revenues. Europe contributed 20.4% to revenues, which increased 18.5% year over year in the quarter. The remaining 4.9% of revenues came from the Rest of the World as sales jumped 26.4% from the year-ago quarter to $122.3 million.

Selling, general & amortization (SG&A) expense as a percentage of revenues declined 30 basis points (bps) from the year-ago quarter to 19.2%. Depreciation & Amortization remained flat at 1.9% in the second quarter.

Operating margin contracted 30 bps from the year-ago quarter to 19.4%, possibly due to unfavourable business mix.

Net Income was almost $404.0 million or 66 cents per share compared with $353.2 million or 58 cents in the year-ago quarter.

 


Cognizant exited the second quarter with cash and cash equivalents of $1.99 billion, significantly up from $1.94 billion at the end of the previous quarter. During the quarter, Cognizant repurchased shares worth $100 million. The company’s board of directors recently expanded the current share buyback program to $2.0 billion from $1.5 billion.

Guidance

For the third quarter of 2014, revenues are expected in the range of $2.55 to $2.58 billion. The high-end of the guidance range is slightly lower than the Zacks Consensus Estimate of $2.66 billion. Earnings are expected to be approximately 63 cents per share, couple of better than the Zacks Consensus Estimate of 61 cents.

For full-year 2014, Cognizant expects revenues to increase at least 14% (down from prior outlook of 16.5%) year over year. The company forecasts earnings of at least $2.54 per share for the full year, much better than the Zacks Consensus Estimate of $2.39.

Our Take

Cognizant’s lowered outlook will remain an overhang on the stock in the near term.  However, 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.

Cognizant’s recent customer deal wins, which are expected to deliver approximately $200 million incremental revenues in 2015, is a significant positive. Moreover, the expanded share buyback program reflects strong liquidity, which will further boost investors’ confidence in the near term.

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

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