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Cognizant (CTSH) Q3 Earnings Beat, Revenues Increase Y/Y

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Cognizant Technology Solutions (CTSH - Free Report) reported third-quarter 2019 non-GAAP earnings of $1.08 per share that beat the Zacks Consensus Estimate by 3 cents. However, the figure decreased 1.8% from the year-ago quarter.

Revenues of $4.25 billion also surpassed the consensus mark of $4.21 billion. The figure improved 5.1% at constant currency (cc) year over year.

Quarter Details

Segment-wise, Financial services (35.1% of revenues), which includes insurance, banking and transaction processing, grew 3% on a year-over-year basis at cc to $1.49 billion. Growth was driven by improvement in project-based work related to insurance and contribution from the previously-announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform. However, softness continued with the company’s largest banking clients.

Healthcare (27.7% of revenues) declined 0.9% year over year at cc to $1.18 billion. The downside resulted from a contract dispute with a customer and the ongoing industry consolidation, which reduced spending and sped up the shift of work to a captive at a large North American client.

However, Life Sciences delivered double-digit growth, driven by large enterprise deals. The company witnessed good traction with digital operation services, momentum in the shared investigator portal for clinical trials and contribution from Zenith Technologies.

Notably, in July 2019, Cognizant completed the acquisition of Zenith Technologies, thus expanding its IoT portfolio. This will enable the company to become a single-source provider of end-to-end smart factory capabilities.

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise

Products and Resources’ (22.7% of revenues) momentum  continued and improved 13.4% year over year at cc to $966 million, driven by growth in retail and consumer goods, travel and hospitality, and manufacturing, logistics, energy and utilities.

Cognizant stated that continued strength in cloud and digital engineering services, and increased demand for interactive, IoT and analytics solutions drove segment revenues.

Communications, Media and Technology revenues (14.5% of revenues) were $615 million, up 10.6% from the year-ago quarter at cc, led by growth in technology. This growth was driven by revenues from recent acquisitions and demand for digital engineering services. However, lower spending by a few large clients hurt the segment’s top-line growth.

Digital revenues grew in the mid-20% range on a year-over-year basis and accounted for almost 35% of total revenues in the reported quarter.

Further, Consulting & Technology services accounted for 59.6% of revenues. Outsourcing services contributed 40.4% of revenues. Additionally, roughly 36.3% of Cognizant’s revenues were from fixed-price contracts.

Region-wise, revenues from North America increased 3.7% year over year at cc and represented 75.9% of total revenues.

Revenues from Europe increased 8.8% from the year-ago quarter at cc and accounted for 17.8% of total revenues. Revenues from the U.K. increased 4.5% at cc. Rest of Europe revenues increased 12.3% at cc.

Rest of the World revenues rose 11.1% at cc and represented 6.4% of total revenues

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, contracted 20 basis points (bps) from the year-ago quarter to 18.1%.

Headcount increased 5.7% year over year. Quarterly annualized attrition was 24%, up 2% year over year and 1% sequentially.

Cognizant reported non-GAAP operating margin of 17.3%, which shrank 160 bps from the year-ago quarter.

Balance Sheet

As of Sep 30, 2019, cash and cash equivalents (and short-term investments) were $3.08 billion, up from $3 billion as of Jun 30, 2019.

Cognizant generated $717 million in cash from operations compared with $575 million reported in the previous quarter.

Free cash flow was $620 million compared with $479 million reported in the previous quarter.

Cognizant bought back 3.6 million shares in the third quarter. It has $519 million remaining under its current share repurchase authorization.

Cognizant declared a quarterly cash dividend of 20 cents per share to be paid out on Nov 19, 2019.

Guidance

For the fourth quarter of 2019, Cognizant expects revenues to grow between 2.1% and 3.1% at cc to $4.23-$4.27 billion. The Zacks Consensus Estimate for revenues is currently pegged at $4.21 billion, indicating growth of 3.2% from the year-ago quarter’s reported figure.

Management expects overall spending in banking to remain sluggish during the second half of the year due to weakness in capital markets and weak macro factors.

Moreover, Cognizant expects that it might lose revenues between $240 million to $270 million on an annual basis from the Communications, Media and Technology segment.

For 2019, revenues are projected to grow between 4.6% and 4.9% year over year at cc (revised from the earlier guidance of 3.9-4.9% year-over-year growth at cc). The consensus mark for revenues is currently pegged at $16.67 billion, indicating growth of 3.4%.

For 2019, adjusted operating margin is expected to be in the range of 16.5-17.0%. The company expects to align the cost structure with revised revenue expectations.

Moreover, steps taken toward simplification of organization structure in the second and third quarters are expected to result in $100 million of annualized savings. Approximately half of that is anticipated to be realized in the remainder of 2019.

Non-GAAP earnings for 2019 are projected between $3.95 and $3.98 per share (up from the previous guidance of $3.92-$3.98).

The Zacks Consensus Estimate for 2019 earnings is currently pegged at $3.96 per share.

Cognizant also announced a 2020 Fit to Growth Plan. The company plans to focus on optimizing its core portfolio while investing in four areas, namely Data, Digital Engineering, Cloud, and IoT.

The company expects to complete optimization of its cost structure by 2020. Efforts to streamline cost structure will result in partial funding for investments in sales and marketing, talent re-skilling, acquisitions, and partnerships apart from technology.

For 2020, the company expects total charges of approximately $150-200 million, primarily related to severance and facility exit costs and annualized gross savings of over $500-550 million in 2021.

Zacks Rank & Stocks to Consider

Cognizant currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector include Five9 Inc. (FIVN - Free Report) , Benefitfocus (BNFT - Free Report) and Advanced Energy Industries (AEIS - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five9, Benefitfocus and Advanced Energy Industries are set to release quarterly results on Nov 5, 6 and 12, respectively.

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