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Leading IT services provider Cognizant Technology Solutions Corp. (CTSH - Analyst Report) reported earnings of 92 cents that beat the Zacks Consensus Estimate by a penny.  Earnings per share (“EPS”) jumped 17.9% year over year and 1.1% sequentially in the reported quarter. The strong growth was primarily driven by an improving top line.

Quarter Details

Revenues jumped 17.1% year over year and 3.0% sequentially to $1.95 billion, in line with the Zacks Consensus Estimate. The strong year-over-year growth was primarily driven by solid performance across all the segments.

Financial services (41.9% of total revenues) that include insurance, banking, and transaction processing grew 3.4% sequentially and 19.9% year over year to $815.4 million. Healthcare (25.7% of total revenue) reported sequential growth of 3.5% and year-over-year growth of 9.4% and reached $500.1 million in the quarter.

Retail/manufacturing/logistics (21% of total revenue) continued to post strong growth in the quarter. Revenues jumped 28.2% year over year and 3.1% quarter over quarter to $408.7 million. Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $224.0 million, up 7.7% from the year-ago quarter and almost flat on a sequential basis.

Region wise, revenues from North America increased 15.7% year over year and 2.1% sequentially to $1.54 billion, representing 78.8% of total revenues. Europe contributed 16.8% of total revenues, which surged 19.0% year over year and 7.8% quarter over quarter to $326.2 million. The remaining 4.4% of total revenues came from the Rest of the World as sales jumped 38.4% from the year-ago quarter and 2.1% from the previous quarter to $86.1 million.

Operating margin (including stock-based compensation) came in at 18.3% versus 18.8% in the previous quarter and 18.5% in the year-ago quarter. The contraction in operating margin was primarily due to 20 basis points expansion in operating expenses as a percentage of revenues. 

Cognizant ended the quarter with cash and cash equivalents of $1.57 billion, up from $1.30 billion at the end of the previous quarter.

Guidance

For first quarter of 2013, Cognizant forecasts revenues of at least $2.0 billion and expects EPS of $1.01. Cognizant expects revenues to increase 17% year over year to at least $8.60 billion that includes $90.0 million from acquisitions. The company forecasts EPS of $4.31 for the full year.

Our Recommendation

Although Cognizant reported a better-than-expected fourth quarter, operating margin contraction will remain a concern going forward. Moreover, Cognizant’s full year guidance reflects sluggish revenue growth amid a volatile macro-economic environment, which may hurt profitability in the near term.

Nevertheless, we believe that Cognizant, which competes with the likes of Accenture (ACN - Analyst Report), Infosys Technologies (INFY - Analyst Report) and Wipro Ltd. (WIT - Snapshot Report), remains well diversified in key verticals such as financial services, health care & life sciences, retail, manufacturing and logistics, which will continue to boost its top line.

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

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