It has been about a month since the last earnings report for Cognizant (CTSH Quick QuoteCTSH - Free Report) . Shares have lost about 1.7% 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 Q4 Earnings Beat Estimates, Revenues Down Y/Y

Cognizant reported fourth-quarter 2023 non-GAAP earnings of $1.18 per share, which beat the Zacks Consensus Estimate by 13.46% and increased 16.8% year over year.

Revenues of $4.76 billion lagged the consensus mark by 0.08%. The top line decreased 1.7% year over year and 2.4% at constant currency (cc). Acquisitions contributed 90 basis points (bps) to top-line growth.

Cognizant’s fourth-quarter results suffered from a challenging macroeconomic environment, cautious clients and limited discretionary spending

Bookings decreased 6% year over year. Cognizant’s fourth-quarter bookings included seven deals that exceeded $100 million each. Of these seven deals, two were new business and five were a mix of renewals and expansions.

On a trailing twelve-month basis, bookings increased 9% year over year to $26.3 billion, which represented a book-to-bill of approximately 1.4 times.

Top-Line Details

Financial services revenues (29.3% of revenues) decreased 5.8% year over year (down 6.6% at cc) to $1.395 billion. The decline was attributed to a challenging demand environment.

Health Sciences revenues (29.3% of revenues) declined 2.1% year over year (down 2.7% at cc) to $1.396 billion. Soft discretionary spending negatively impacted top-line growth.

Products and Resources revenues (24.4% of revenues) increased 1.9% year over year (up 0.6% at cc) to $1.16 billion. The segment benefited from acquisitions.

Communications, Media and Technology revenues (16.9% of revenues) were $804 million, which increased 2.6% from the year-ago quarter (up 2% at cc). The segment benefited from new acquisitions and the ramp of new bookings.

Region-wise, revenues from North America decreased 1.6% year over year (down 1.7% at cc) and accounted for 74.2% of total revenues.

Revenues from Europe increased 1.3% from the year-ago quarter (down 3.4% at cc) and made up 19.3% of total revenues. Revenues from the U.K. decreased 1.1% (down 5.8% at cc). Continental Europe revenues increased 3.8% (down 1% at cc).

The Rest of the World revenues decreased 9.9% year over year (down 7.9% at cc) and represented 6.5% of total revenues.

Operating Details

Selling, general & administrative expenses, as a percentage of revenues, decreased 130 bps year over year to 16.5%.

Total headcount at the end of the fourth quarter was 347,700, down 7,600 year over year but up 1,100 sequentially.

Voluntary attrition - Tech Services for the year ended Dec 31, 2023, declined to 13.8% from 25.6% for the year ended Dec 31, 2022.

Cognizant reported a GAAP operating margin of 15.2%, up 100 bps on a year-over-year basis.

The company incurred $40 million in costs related to the NextGen program, negatively impacting the GAAP operating margin by 90 bps.

Non-GAAP operating margin (adjusted for NextGen charges) of 16.1% expanded 190 bps year over year.

Balance Sheet

Cognizant had cash and short-term investments of $2.64 billion as of Dec 31, 2023 compared with $2.37 billion as of Sep 30, 2023.

As of Dec 31, 2023, the company had a total debt of $639 million, down from $647 million reported as of Sep 30, 2023.

It generated $737 million in cash from operations compared with $828 million in the previous quarter.

Free cash flow was $659 million compared with free cash flow of $755 million reported in the prior quarter.

In the fourth quarter of 2023, the company returned $298 million through share repurchases. As of Dec 31, 2023, it had $1.8 billion remaining under the current share repurchase program.

Cognizant raised its dividend payout by 3% year over year to 30 cents per share, payable on Feb 28 to shareholders of record Feb 20.

Guidance

Cognizant expects first-quarter 2024 revenues between $4.68 billion and $4.76 billion, indicating a decline of 2.7% to 1.2% (a decline of 3-1.5% on a cc basis).

In the Financial Services segment, Cognizant continues to expect the challenging macro environment to hurt spending rates, thereby negatively impacting top-line growth.

For 2024, revenues are expected to be $19-$19.8 billion, indicating a decline of 1.8% to growth of 2.2% on a reported basis (down 2% to growth of 2% on a cc basis). Acquisitions are expected to contribute 100 bps and 20 bps positive impact from favorable forex.

Adjusted operating margin for 2024 is expected to be between 15.3% and 15.5%. Adjusted earnings for 2024 are expected between $4.50 and $4.68 per share.

Moreover, it still expects to incur $300 million in NextGen charges, out of which $70 million will be recognized in 2024.

Cognizant expects to return $1 billion to shareholders through share repurchases (at least $400 million) and regular quarterly dividends.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Cognizant has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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 looks promising. Notably, Cognizant has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.