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Cognizant's 1Q Earnings Beat Estimates

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Leading IT services provider Cognizant Technology Solutions Corp. (CTSH - Free Report) reported earnings of 95 cents per share that beat the Zacks Consensus Estimate by 3 cents.

Earnings per share jumped 20.3% year over year and 3.3% sequentially in the reported quarter. The strong growth was primarily driven by an improving top line.


Revenues jumped 18.1% year over year and 3.7% sequentially to $2.02 billion, in line with the Zacks Consensus Estimate.  The strong year-over-year growth was primarily driven by solid performance across all the segments.

First quarter revenues included $8.2 million from the acquisition of C1 Group.

Financial services (42.3% of revenues) that include insurance, banking, and transaction processing grew 4.9% sequentially and 23.1% year over year to $855.3 million.

Healthcare (25.2% of revenues) reported sequential growth of 2.0% and year-over-year growth of 9.1% to reach $510.0 million in the quarter.

Retail/manufacturing/logistics (21.1% of total revenue) continued to post strong growth in the quarter. Revenues jumped 27.2% year over year and 4.2% quarter over quarter to $425.8 million.

Other revenues, which include sales from service-oriented industries like communications, media and high tech, were $229.5 million, up 7.0% from the year-ago quarter and 2.5% from the prior quarter.

Region wise, revenues from North America increased 16.3% year over year and 3.0% sequentially to $1.58 billion, representing 78.3% of total revenue.

Europe contributed 17.2% of total revenue, which surged 22.7% year over year and 6.7% quarter over quarter to $348.3 million.

The remaining 4.5% of total revenue came from the Rest of the World as sales jumped 35.4% from the year-ago quarter and 4.8% from the previous quarter to $90.3 million.


Selling, general & administrative expense as a percentage of revenues declined 20 basis points (“bps”) from the year-ago quarter and 150 bps from the previous quarter to 20.4%.

Depreciation & amortization (D&A) as a percentage of revenues climbed 10 bps from the year-ago quarter but remained flat on a sequential basis.

Operating margin (including stock-based compensation) climbed 10 bps from the year-ago quarter but contracted 50 bps sequentially to 18.4%.

Balance Sheet & Cash Flow

Cognizant ended the quarter with cash and cash equivalents of $1.47 billion, down from $1.57 billion at the end of the previous quarter.

Cognizant’s board of directors expanded its current share repurchase program by $500.0 million to $1.5 billion and extended the term of the program to Dec 31, 2014.


For the second quarter of 2013, Cognizant forecasts revenues of at least $2.13 billion and expects earnings of $1.06 on a non-GAAP basis.

For full year 2013, Cognizant expects revenues to increase at least 17% year over year to $8.60 billion. The company forecasts earnings of $4.31 per share for the full year.

Our Recommendation

Although Cognizant reported a better-than-expected first quarter, operating margin contraction on a sequential basis will remain a concern in the near term. Moreover, Cognizant’s full year guidance reflects sluggish revenue growth amid a volatile macro-economic environment, which may hurt profitability in the near term.

Additionally, the uncertainty surrounding the new immigration reform bill is expected to remain a major overhang on Cognizant going forward.

Nevertheless, we believe that Cognizant, which competes with the likes of Accenture (ACN - Free Report) , Infosys Technologies (INFY - Free Report) and Wipro Ltd. (WIT - Free Report) , remains well diversified in key verticals and emerging markets of social, mobile, analytics and cloud, which will continue to boost its top line.

Currently, Cognizant has a Zacks Rank #3 (Hold).

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