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Why Is Cognizant (CTSH) Down 5.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Cognizant (CTSH - Free Report) . Shares have lost about 5.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cognizant due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Cognizant's Q1 Earnings Beat, Revenues Increase Y/Y

Cognizant Technology Solutions reported first-quarter 2021 non-GAAP earnings of 97 cents per share that beat the Zacks Consensus Estimate by 3.2% and climbed 1% year over year.

Revenues of $4.40 billion beat the consensus mark by 0.9% and increased 4.2% year over year. At constant currency (cc), revenues inched up 2.4%. The top line comfortably surpassed management’s revenue guidance range of $4.34-4.38 billion.

Digital revenues accounted for 44% of revenues (compared with 39% in the year-ago quarter) and increased 15% year over year. Digital bookings grew 5% year over year despite tough year-over-year comparison.

Moreover, acquisitions contributed 300 basis points (bps) of growth, which fully offset 90 bps negative impact from the exit of certain content services.

Top-Line Details

Segment-wise, Financial services (33.1% of revenues) declined 1.7% year over year at cc to $1.46 billion. Growth in digital revenues was fully offset by lower non-digital revenues.

Healthcare (29.3% of revenues) increased 7% year over year at cc to $1.29 billion, driven by growth in both healthcare payer and life sciences businesses.

Products and Resources (22.7% of revenues) increased 2.4% year over year at cc to $998 million due to mid-single-digit decline in retail and consumer goods, and travel and hospitality clients being affected by the coronavirus pandemic. This was partially offset by double-digit growth in manufacturing, logistics, energy and utilities.

Communications, Media and Technology revenues (14.9% of revenues) were $657 million, up 3.1% from the year-ago quarter at cc. Acquisitions drove communication and media revenues. Technology’s double-digit growth was negated by negative impact of 600 bps related to the company’s exit from certain content-related services.

Region-wise, revenues from North America increased 2.7% year over year at cc and represented 74.6% of total revenues.

Revenues from Europe decreased 0.9% from the year-ago quarter at cc and accounted for 18.8% of total revenues. While revenues from the United Kingdom increased 2.7% at cc, Continental Europe revenues declined 3.7% year over year.

Rest of the World revenues rose 8.9% at cc and represented 6.6% of total revenues.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, increased 390 bps year over year to 19.9%.

Net headcount increased 1.6% year over year. Quarterly annualized attrition was 21%, up 2% sequentially.

Cognizant reported non-GAAP operating margin of 15.2%, which expanded 10 bps year over year due to lower travel and entertainment expenses, savings from cost initiatives in 2020 and lower immigration costs.

Balance Sheet

Cognizant had cash and cash equivalents (and short-term investments) of $2.16 billion as of Mar 31, 2021, compared with $2.72 billion as of Dec 31, 2020.

Notably, the company has no significant debt maturities until 2023. As of Mar 31, 2021, Cognizant had a total debt of $692 million down from $701 million as of Dec 31, 2020.

Cognizant generated $181 million in cash from operations compared with $898 million reported in the previous quarter.

Free cash flow was $93 million compared with $809 million reported in the previous quarter.

In first-quarter 2021, Cognizant returned $234 million through share repurchases and $128 million in dividends to shareholders.

As of Mar 31, 2021, Cognizant had $2.6 billion remaining under the current share-repurchase program.

Guidance

Second-quarter 2021 revenues are expected between $4.42 billion and $4.46 billion, indicating growth of 8 on a cc basis. This assumes an estimated 250 bps favorable foreign exchange impact and 400 bps contribution from acquisitions.

Full-year 2021 revenues are still expected between $17.8 billion and $18.1 billion, indicating growth of 5.5-7.5% on a cc basis. This assumes an estimated 150 bps favorable foreign exchange impact and 300 bps contribution from acquisitions.

The company expects adjusted operating margin to be in the range of 15.2%-15.7% (down from 15.2%- 16.3% range) in 2021, reflecting higher personnel-related investments.

Full-year 2021 adjusted earnings are expected to be in the range of $3.90-4.02 per share.

For 2021, Cognizant expects free cash flow to be lower compared with 2020 due to absence of tax deferrals (offered by the government in 2020 as a result of the COVID-19 pandemic) and higher cash incentive payout in first-quarter 2021 compared with the year-ago quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Cognizant has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cognizant has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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