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Cognizant (CTSH) Beats on Q3 Earnings, Sales; Tweaks View

CTSH INFY ACN WIP

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Cognizant Technology Solutions Corp.’s (CTSH - Free Report) third-quarter 2016 adjusted earnings of 81 cents per share beat the Zacks Consensus Estimate of 75 cents. Revenues of $3.453 billion also beat the Zacks Consensus Estimate of $3.449 billion by a slight margin. Sales grew 8.4% year over year.

Quarter Details

Segment wise, the Financial services segment (39.8% of revenues) that includes insurance, banking and transaction processing grew 7.1% year over year to $1,375.4 million. Health care (28.8% of revenues) grew 5.7% year over year to $992.8 million. Manufacturing/Retail/Logistics (19.7% of revenues) continued its growth momentum and jumped 12% year over year to $678.7 million. Other revenues (11.8% of revenues), which includes sales from service-oriented industries like communications, media and high tech, were $406.3 million, up 13.6% from the year-ago quarter.

Region-wise, revenues from North America increased 7.9% year over year and represented 78.5% of total revenue. Revenues from United Kingdom (8.5% of the total revenues) declined 2.3% year over year, though it was completely offset by an increase of 17% in sales from Rest of Europe, which contributed 7.1% to total revenue. The remaining 6% came from the Rest of the World where revenues increased 23.2%.

Selling, general & amortization (SG&A) expense, as a percentage of revenues, increased 60 basis points (bps) from the year-ago quarter to 20.3%.

The company reported GAAP operating margin of 16.9%.

Balance Sheet

Cognizant exited the quarter with cash and cash equivalents (and short-term investments) of $4.86 billion, compared with $4.95 billion as of Dec 31, 2015. The company’s long-term debt was $821.6 million compared with $876.8 million as of Dec 31, 2015.

Guidance

For the fourth quarter of 2016, the company expects revenues in a range of $3.45 billion to $3.51 billion. The Zacks Consensus Estimate for the same is pegged at $3.515 billion. Non-GAAP earnings per share are expected to be in a band of 85 to 88 cents.

Cognizant updated its non-GAAP earnings expectation for 2016 in a range of $3.38 to $3.41 (compared with the earlier expectation of $3.32 to $3.44). Revenues are now expected to lie in a range of $13.47 billion to $13.53 billion compared with the earlier projection of $13.47 billion to $13.60 billion.

Our Take

Cognizant is expected to benefit from the ongoing digitization of businesses. Moreover, apart from being a prominent technological services provider, Cognizant has been increasing its focus on high profit areas like professional consulting and business-process outsourcing, which is a positive.

However, the company has been seeing some sluggishness of late in the healthcare and financial sector, which are its biggest markets. Moreover, in such a turbulent market, the company has to constantly fend off competition from peers like Accenture (ACN - Free Report) , Infosys (INFY - Free Report) and Wipro Ltd. (WIP - Free Report) , which is a headwind.

Currently, Cognizant has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

COGNIZANT TECH Price, Consensus and EPS Surprise

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