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Cognizant Q3 Earnings Beat Estimates: Will Raised View Aid Shares?

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Cognizant Technology Solutions (CTSH - Free Report) reported non-GAAP earnings of $1.25 per share in third-quarter 2024, which beat the Zacks Consensus Estimate by 9.65% and increased 7.8% year over year.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Revenues of $5 billion beat the consensus mark by 0.82%. The top line increased 3% year over year and 2.7% at constant currency (cc). Acquisitions contributed 150 basis points (bps) to top-line growth.

On a trailing 12-month basis, bookings declined 2% year over year to $26.2 billion, which represented a book-to-bill of approximately 1.3 times. Six deals, each more than $100 million in TCV, were signed. This included four deals in Health Sciences, one in financial services and one in CMT.

Cognizant is heavily investing in AI, with a commitment of $1 billion to enhance platforms and capabilities.

CTSH’s shares have underperformed the Zacks Computer & Technology sector year to date. The stock has moved up 1.5%, while the broader sector has appreciated 27.6%. We believe the raised guidance will help CTSH stock to recover.

CTSH’s Top-Line Details

Financial services revenues (29.5% of revenues) increased 0.7% year over year (up 0.5% at cc) to $1.486 billion. The growth is primarily due to improved discretionary spending and strong execution.

Health Sciences revenues (30% of revenues) increased 7.8% year over year (up 7.6% at cc) to $1.514 billion. The growth is driven by strong offerings and recent large deal wins.

Products and Resources revenues (24.3% of revenues) increased 5% year over year (up 4.6% at cc) to $1.22 billion.

Communications, Media and Technology revenues (16.2% of revenues) were $816 million, which decreased 3.7% from the year-ago quarter (up 4.1% at cc). 

Region-wise, revenues from North America increased 3.8% year over year and at cc and contributed 74% to total revenues.

Revenues from Europe fell 0.3% year over year (down 1.9% at cc) and contributed 19.2% to total revenues. Revenues from the U.K. declined 0.8% (down 2.9% at cc). Continental Europe revenues increased 0.2% (down 0.8% at cc).

The Rest of the World revenues increased 4.3% year over year (up 4.2% at cc) and contributed 6.8% to total revenues.

CTSH’s Operating Details

Selling, general & administrative expenses, as a percentage of revenues, expanded 20 bps year over year to 16.5%.

Total headcount at the end of the third quarter was 340,100 compared with 336,300 in the previous quarter. 

Voluntary attrition - Tech Services on a trailing-12-month basis increased to 14.6%, down from 16.2% for the period ended Sept. 30, 2023. 

Cognizant reported a GAAP operating margin of 14.6%, expanding 60 bps on a year-over-year basis.

The company incurred $33 million in costs related to the NextGen program, negatively impacting the GAAP operating margin by 70 bps.

Non-GAAP operating margin (adjusted for NextGen charges) of 15.3% contracted 20 bps year over year.

CTSH’s Balance Sheet

CTSH had cash and short-term investments of $2.02 billion as of Sept. 30, 2024, compared with $2.2 billion as of June 30, 2024.

As of Sept. 30, 2024, the company had a total debt of $1.2 billion, up from $623 million reported as of June 30, 2024.

It generated $847 million in cash from operations compared with $262 million in the previous quarter.

Free cash flow was $791 million compared with free cash flow of $183 million reported in the prior quarter.

CTSH Initiates Strong 2024 Guidance

Cognizant expects fourth-quarter 2024 revenues between $5 billion and $5.1 billion, indicating growth of 5.1-7.1% (an increase of 4.8% to 6.8% on a cc basis). 

For 2024, revenues are expected to be in the range of $19.7-$19.8 billion, indicating an increase of 1.6-2.1% on a reported basis (an increase of 1.4% to 1.9% on a cc basis). Acquisitions are expected to contribute 200 bps.

Adjusted operating margin for 2024 is expected to be approximately 15.1%, unchanged year over year.

Adjusted earnings per share for 2024 are expected between $4.63 and $4.67.

Zacks Rank & Stocks to Consider

CTSH currently carries a Zacks Rank #3 (Hold).

Shopify (SHOP - Free Report) , Arista Networks (ANET - Free Report) and Blackline (BL - Free Report) are some better-ranked stocks that investors can consider in the broader sector. Each stock presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shopify shares have risen 2.7% year to date. SHOP is set to report its third-quarter 2024 results on Nov. 12.

Arista Networks shares have rallied 68.2% year to date. ANET is set to report its third-quarter 2024 results on Nov. 7.

Blackline shares have lost 10.1% year to date. BL is set to report its third-quarter 2024 results on Nov. 7.

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