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Cognizant (CTSH) Q2 Earnings Beat Estimates, Revenues Down Y/Y
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Cognizant Technology Solutions (CTSH - Free Report) reported second-quarter 2023 non-GAAP earnings of $1.10 per share, which beat the Zacks Consensus Estimate by 13.4% but decreased 3.5% year over year.
Revenues of $4.89 billion beat the consensus mark by 1.5%. However, the top line decreased 0.4% year over year and 0.1% at constant currency (cc). On a sequential basis, revenues increased more than 1%.
Acquisitions contributed 130 basis points (bps) to top-line growth.
Bookings increased 17% year over year, which benefited from mix-shift towards larger deals. Cognizant continued to witness weakness in smaller, shorter-duration contracts, primarily due to sluggish discretionary spending.
Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise
On a trailing twelve-month basis, bookings increased 14% year over year to $26.4 billion, which represented a book-to-bill of approximately 1.4 times.
Top-Line Details
Financial services revenues (29.9% of revenues) decreased 4.8% year over year at cc to $1.46 billion. The decline was attributed to a challenging demand environment and weakness in discretionary spending.
Financial services revenues missed the Zacks Consensus Estimate by 1.41%.
Health Sciences revenues (29.5% of revenues) increased 2.1% year over year at cc to $1.44 billion. Strong demand for integrated software solutions (up mid-teens year over year) drove growth.
Health Sciences revenues beat the consensus mark by 0.61%.
Products and Resources revenues (24.1% of revenues) increased 3.7% year over year at cc to $1.18 billion and beat the Zacks Consensus Estimate by 4.05%. Continued strength among automotive, travel and hospitality customers benefited the segment’s top-line growth.
Communications, Media and Technology revenues (16.5% of revenues) were $806 million, which declined 0.4% from the year-ago quarter at cc but beat the consensus mark by 0.51%.
Region-wise, revenues from North America decreased 1.7% year over year at cc and accounted for 73.5% of total revenues. The decline was primarily attributed to weakness in Financial Services, as well as the Communications, Media and Technology segment.
Revenues from Europe increased 6.3% from the year-ago quarter at cc and made up 19.8% of total revenues. Revenues from the U.K. and Continental Europe increased 3.3% and 9.5% year over year at cc, respectively.
The Rest of the World revenues were flat at cc and represented 6.8% of total revenues.
Operating Details
Selling, general & administrative expenses, as a percentage of revenues, decreased 100 bps year over year to 17%.
Total headcount at the end of the second quarter was 345,600, down 5,900 sequentially but up 4,300 year over year.
Voluntary attrition – Tech Services, on a trailing 12-month basis, declined to 19.9% from 23.1% in the first quarter of 2023 and 31.1% in the second quarter of 2022.
Cognizant reported a non-GAAP operating margin of 14.2%, which contracted 130 bps year over year.
The company incurred $117 million in costs related to the NextGen program, negatively impacting GAAP operating margin by 240 bps.
Key Q2 Developments
Cognizant strengthened its partner base in the reported quarter. It expanded its partnership with Gilead Sciences, ServiceNow (NOW - Free Report) , Alphabet’s (GOOGL - Free Report) division Google Cloud, AT&T and Orkla. Cognizant also inked new partnerships with Microsoft (MSFT - Free Report) subsidiary Nuance Communications and Accuray.
The partnership with Gilead Sciences is valued at $800 million over the next five years. Per the renewed and expanded partnership, Cognizant will manage Gilead’s global IT infrastructure, platforms, applications and advanced analytics, and lead initiatives designed to accelerate its digital transformation, leveraging the power of generative AI.
The expanded partnership with ServiceNow aims to improve AI-driven automation across industries. Cognizant’s newly formed ServiceNow Business Group will offer AI-based solutions that will solve complex problems, automate operations, and enhance employee and end-customer experiences.
Moreover, as a part of its expanding alliance with Google Cloud, Cognizant will open new Google Cloud AI innovation centers in Bangalore, London and San Francisco to support a new Cognizant Google Cloud AI University to train 25,000 Cognizant associates and clients.
Cognizant will help the Microsoft subsidiary Nuance to develop Dragon Ambient eXperience Operations. For Accuray, the company will support its deployment of SAP S/4HANA to obtain better data and analytics and achieve greater business efficiencies.
Moreover, Cognizant launched a new business group, Cognizant Ocean, to help support ocean industries or the “Blue Economy,” leveraging digital technologies, including AI and data analytics.
Blue Economy companies encompass a broad range of sectors, including shipping, marine transportation, offshore oil and gas, marine renewables, aquaculture and marine conservation. These companies are facing challenges related to sustainability, environmental impact and climate change.
Cognizant Ocean will help Blue Economy companies to be more sustainable and efficient. Apart from improving business outcomes, Cognizant will help reduce their carbon output and decarbonize the oceans.
The company also announced a partnership with Tidal, a project inside X, Alphabet’s Moonshot Factory. Under the collaboration, Tidal’s ocean information platform will be widely available to the aquaculture market. Tidal leverages innovation in underwater perception, machine learning, AI and automation to gather and analyze data.
Balance Sheet
Cognizant had cash and short-term investments of $2.1 billion as of Jun 30, 2023 compared with $2.48 billion as of Mar 31, 2023.
As of Jun 30, 2023, the company had a total debt of $793 million, up from $646 million reported as of Mar 31, 2023.
It generated $36 million in cash from operations compared with $729 million in the previous quarter.
Free cash outflow was $32 million against free cash flow of $631 million reported in the prior quarter. Free cash flow was negatively impacted by tax payments of approximately $300 million related to 2022.
In the second quarter of 2023, the company returned $200 million through share repurchases. As of Jun 30, 2023, it had $2.4 billion remaining under the current share repurchase program.
Guidance
Cognizant expects third-quarter 2023 revenues between $4.89 billion and $4.94 billion, indicating a decline of 0.5% to an increase of 0.5% on a cc basis. Favorable forex is expected to aid the top line by 110 bps while acquisitions are expected to contribute 100 bps.
In the Financial Services segment, this Zacks Rank #3 (Hold) company continues to expect the challenging macro environment to hurt spending rates, thereby negatively impacting top-line growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cognizant expects the Communications, Media and Technology segment to improve in the third quarter of 2023, due to ramping up of new bookings.
However, it expects a softer fourth quarter than usual due to weak and sluggish discretionary spending.
For 2023, revenues are expected to be $19.2-$19.6 billion, indicating a decline of 1% to growth of 1% at cc. Adjusted operating margin for 2023 is expected between 14.2% and 14.7%. Adjusted earnings for 2023 are expected between $4.25 and $4.44 per share.
The company anticipates interest income of $115 million in 2023. Moreover, Cognizant now expects to incur $350 million in NextGen charges, out of which, $250 million will be recognized in 2023.
Cognizant still expects to return $1.4 billion to shareholders through share repurchases and regular quarterly dividends.
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Cognizant (CTSH) Q2 Earnings Beat Estimates, Revenues Down Y/Y
Cognizant Technology Solutions (CTSH - Free Report) reported second-quarter 2023 non-GAAP earnings of $1.10 per share, which beat the Zacks Consensus Estimate by 13.4% but decreased 3.5% year over year.
Revenues of $4.89 billion beat the consensus mark by 1.5%. However, the top line decreased 0.4% year over year and 0.1% at constant currency (cc). On a sequential basis, revenues increased more than 1%.
Acquisitions contributed 130 basis points (bps) to top-line growth.
Bookings increased 17% year over year, which benefited from mix-shift towards larger deals. Cognizant continued to witness weakness in smaller, shorter-duration contracts, primarily due to sluggish discretionary spending.
Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise
Cognizant Technology Solutions Corporation price-consensus-eps-surprise-chart | Cognizant Technology Solutions Corporation Quote
On a trailing twelve-month basis, bookings increased 14% year over year to $26.4 billion, which represented a book-to-bill of approximately 1.4 times.
Top-Line Details
Financial services revenues (29.9% of revenues) decreased 4.8% year over year at cc to $1.46 billion. The decline was attributed to a challenging demand environment and weakness in discretionary spending.
Financial services revenues missed the Zacks Consensus Estimate by 1.41%.
Health Sciences revenues (29.5% of revenues) increased 2.1% year over year at cc to $1.44 billion. Strong demand for integrated software solutions (up mid-teens year over year) drove growth.
Health Sciences revenues beat the consensus mark by 0.61%.
Products and Resources revenues (24.1% of revenues) increased 3.7% year over year at cc to $1.18 billion and beat the Zacks Consensus Estimate by 4.05%. Continued strength among automotive, travel and hospitality customers benefited the segment’s top-line growth.
Communications, Media and Technology revenues (16.5% of revenues) were $806 million, which declined 0.4% from the year-ago quarter at cc but beat the consensus mark by 0.51%.
Region-wise, revenues from North America decreased 1.7% year over year at cc and accounted for 73.5% of total revenues. The decline was primarily attributed to weakness in Financial Services, as well as the Communications, Media and Technology segment.
Revenues from Europe increased 6.3% from the year-ago quarter at cc and made up 19.8% of total revenues. Revenues from the U.K. and Continental Europe increased 3.3% and 9.5% year over year at cc, respectively.
The Rest of the World revenues were flat at cc and represented 6.8% of total revenues.
Operating Details
Selling, general & administrative expenses, as a percentage of revenues, decreased 100 bps year over year to 17%.
Total headcount at the end of the second quarter was 345,600, down 5,900 sequentially but up 4,300 year over year.
Voluntary attrition – Tech Services, on a trailing 12-month basis, declined to 19.9% from 23.1% in the first quarter of 2023 and 31.1% in the second quarter of 2022.
Cognizant reported a non-GAAP operating margin of 14.2%, which contracted 130 bps year over year.
The company incurred $117 million in costs related to the NextGen program, negatively impacting GAAP operating margin by 240 bps.
Key Q2 Developments
Cognizant strengthened its partner base in the reported quarter. It expanded its partnership with Gilead Sciences, ServiceNow (NOW - Free Report) , Alphabet’s (GOOGL - Free Report) division Google Cloud, AT&T and Orkla. Cognizant also inked new partnerships with Microsoft (MSFT - Free Report) subsidiary Nuance Communications and Accuray.
The partnership with Gilead Sciences is valued at $800 million over the next five years. Per the renewed and expanded partnership, Cognizant will manage Gilead’s global IT infrastructure, platforms, applications and advanced analytics, and lead initiatives designed to accelerate its digital transformation, leveraging the power of generative AI.
The expanded partnership with ServiceNow aims to improve AI-driven automation across industries. Cognizant’s newly formed ServiceNow Business Group will offer AI-based solutions that will solve complex problems, automate operations, and enhance employee and end-customer experiences.
Moreover, as a part of its expanding alliance with Google Cloud, Cognizant will open new Google Cloud AI innovation centers in Bangalore, London and San Francisco to support a new Cognizant Google Cloud AI University to train 25,000 Cognizant associates and clients.
Cognizant will help the Microsoft subsidiary Nuance to develop Dragon Ambient eXperience Operations. For Accuray, the company will support its deployment of SAP S/4HANA to obtain better data and analytics and achieve greater business efficiencies.
Moreover, Cognizant launched a new business group, Cognizant Ocean, to help support ocean industries or the “Blue Economy,” leveraging digital technologies, including AI and data analytics.
Blue Economy companies encompass a broad range of sectors, including shipping, marine transportation, offshore oil and gas, marine renewables, aquaculture and marine conservation. These companies are facing challenges related to sustainability, environmental impact and climate change.
Cognizant Ocean will help Blue Economy companies to be more sustainable and efficient. Apart from improving business outcomes, Cognizant will help reduce their carbon output and decarbonize the oceans.
The company also announced a partnership with Tidal, a project inside X, Alphabet’s Moonshot Factory. Under the collaboration, Tidal’s ocean information platform will be widely available to the aquaculture market. Tidal leverages innovation in underwater perception, machine learning, AI and automation to gather and analyze data.
Balance Sheet
Cognizant had cash and short-term investments of $2.1 billion as of Jun 30, 2023 compared with $2.48 billion as of Mar 31, 2023.
As of Jun 30, 2023, the company had a total debt of $793 million, up from $646 million reported as of Mar 31, 2023.
It generated $36 million in cash from operations compared with $729 million in the previous quarter.
Free cash outflow was $32 million against free cash flow of $631 million reported in the prior quarter. Free cash flow was negatively impacted by tax payments of approximately $300 million related to 2022.
In the second quarter of 2023, the company returned $200 million through share repurchases. As of Jun 30, 2023, it had $2.4 billion remaining under the current share repurchase program.
Guidance
Cognizant expects third-quarter 2023 revenues between $4.89 billion and $4.94 billion, indicating a decline of 0.5% to an increase of 0.5% on a cc basis. Favorable forex is expected to aid the top line by 110 bps while acquisitions are expected to contribute 100 bps.
In the Financial Services segment, this Zacks Rank #3 (Hold) company continues to expect the challenging macro environment to hurt spending rates, thereby negatively impacting top-line growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cognizant expects the Communications, Media and Technology segment to improve in the third quarter of 2023, due to ramping up of new bookings.
However, it expects a softer fourth quarter than usual due to weak and sluggish discretionary spending.
For 2023, revenues are expected to be $19.2-$19.6 billion, indicating a decline of 1% to growth of 1% at cc. Adjusted operating margin for 2023 is expected between 14.2% and 14.7%. Adjusted earnings for 2023 are expected between $4.25 and $4.44 per share.
The company anticipates interest income of $115 million in 2023. Moreover, Cognizant now expects to incur $350 million in NextGen charges, out of which, $250 million will be recognized in 2023.
Cognizant still expects to return $1.4 billion to shareholders through share repurchases and regular quarterly dividends.