A month has gone by since the last earnings report for Cognizant (CTSH - Free Report) . Shares have added about 2.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Cognizant due for a pullback? 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 drivers.
Cognizant Q3 Earnings & Revenues Increase Y/Y
Cognizant delivered third-quarter 2018 non-GAAP earnings of $1.19 per share, which beat the Zacks Consensus Estimate by six cents and increased 21.4% from the year-ago quarter. The figure was better than management’s expectation of $1.13 per share.
However, revenues of $4.078 billion lagged the Zacks Consensus Estimate of $4.084 billion. The figure improved 8.3% year over year, driven by growth in all four domains. The figure was within management’s guidance of $4.06-$4.10 billion.
The company adopted ASC 606 (new revenue standard), which positively impacted revenues by $33 million, income from operations by $37 million and earnings by a nickel.
Segment-wise, Financial services (35.9% of revenues), which includes insurance, banking and transaction processing, grew 2.6% year over year to $1.46 billion. The company witnessed modest growth in both banking and insurance.
Healthcare (29.2% of revenues) grew 9.6% year over year to $1.19 billion. Top-line growth can be attributed to strong demand for the company’s solutions across healthcare and life sciences platform.
Products and Resources (21.1% of revenues) continued its growth momentum and improved 11.5% year over year to $863 million, driven by growth in manufacturing and retail clients.
Communications, Media and Technology (13.8% of revenues) were $562 million, up 17.1% from the year-ago quarter.
Digital revenues grew in the low 20% range on a year-over-year basis and were slightly above 30% of total revenues in the reported quarter. Moreover, Cognizant added seven new strategic customers during the quarter, bringing the total to 378.
Further, Consulting & Technology services revenues were up 6.6% year over year. Moreover, outsourcing services revenues increased 10.7% from the year-ago quarter.
Additionally, roughly 36% of Cognizant’s revenues were from fixed price contracts.
Region-wise, revenues from North America increased 7.5% year over year and represented 76.1% of total revenues. Revenues from Europe increased 15.1% from the year-ago quarter and accounted for 17.7% of total revenues. Rest of the World revenues inched up 0.4% and represented 6.1% of total revenues.
Selling, general & administrative (SG&A) expenses, as a percentage of revenues, increased 10 basis points (bps) from the year-ago quarter to 18%.
Headcount increased 5,300 sequentially and 18,100 year over year. Annualized attrition was 22.3%, almost flat year over year.
Cognizant reported non-GAAP operating margin of 21.1%, which expanded 110 bps from the year-ago quarter.
As of Sep 30, 2018, cash and cash equivalents (and short-term investments) were $4.76 billion, up from $4.25 billion reported as of Jun 30, 2018.
Cognizant generated $862 million in cash from operations. The company bought back 1.4 million shares in the reported quarter.
Cognizant declared a quarterly cash dividend of 20 cents per share payable on Nov 30, 2018.
For the fourth quarter of 2018, Cognizant expects revenues between $4.09 billion and $4.13 billion. Non-GAAP earnings are anticipated to be at least $1.05 per share, reflecting almost 2% year-over-year growth.
For 2018, revenues are projected between $16.09 billion and $16.13 billion compared with previous guidance of $16.05-$16.30 billion.
Non-GAAP operating margin is still expected to be roughly 21%. Non-GAAP earnings are projected to be at least $4.50 per share, up from previous guidance of $4.47 per share.
Cognizant remains on track to achieve 22% non-GAAP operating margin in 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.52% due to these changes.
At this time, Cognizant has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
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.