Cognizant (CTSH) Q1 Earnings Beat, Revenues Increase Y/Y

Cognizant Technology Solutions CTSH reported first-quarter 2020 non-GAAP earnings of 96 cents per share that beat the Zacks Consensus Estimate by 4.3%. Moreover, the figure increased 5.5% from the year-ago quarter.

First-quarter revenues of $4.22 billion matched the consensus mark. The figure improved 3.5% year over year at constant currency (cc).

COVID-19-related disruptions reduced revenues in March, reflecting delays in project fulfillment as Cognizant rapidly enabled the shift to work-from-home capabilities across its delivery teams.
 
Quarter Details

Segment-wise, Financial services (34.3% of revenues) grew 1.8% on a year-over-year basis at cc to $1.45 billion, primarily driven by insurance.

Moreover, growth in banking sector was stable, driven by the partnership with three Finnish financial institutions to transform and operate a shared core banking platform and regional banks in North America. The growth was partially offset by softness at some of Cognizant’s largest banking and insurance clients.

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Healthcare (28.3% of revenues) increased 2.7% year over year at cc to $1.19 billion. The upside was driven by double-digit growth in life sciences and the contribution of Zenith Technologies, which was acquired in July 2019.

However, healthcare growth was partially offset by the negative impact of industry consolidation and the movement of work to a captive at a large North American client.

Products and Resources’ (22.6% of revenues) momentum continued. Revenues increased 5.3% year over year at cc to $954 million, driven by growth in retail and consumer goods, and manufacturing, logistics, energy and utilities, partially offset by softness in the travel and hospitality industries.

Communications, Media and Technology revenues (14.8% of revenues) were $626 million, up 6.3% from the year-ago quarter at cc, driven by broad-based growth across all industries in this segment.

However, technology revenue growth was hurt by the company’s decision to exit certain portions of its content services business.

Consulting & Technology services accounted for 60.3% of revenues. Outsourcing services contributed 39.7% of revenues. Additionally, roughly 36.8% of Cognizant’s revenues were from fixed-price contracts.

Region-wise, revenues from North America increased 2.2% year over year at cc and represented 75.5% of total revenues.

Revenues from Europe increased 7.6% from the year-ago quarter at cc and accounted for 18.3% of total revenues. Rest of the World revenues rose 3.5% at cc and represented 6.2% of total revenues.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, contracted 290 basis points (bps) from the year-ago quarter to 18.2%.

Headcount increased 2.1% year over year. Quarterly annualized attrition was 22%, up 3% year over year and 1% sequentially.

Cognizant reported non-GAAP operating margin of 15.1%, which was flat year over year.

Balance Sheet

Notably, Cognizant drew $1.74 billion from its revolving credit facility on Mar 23 to strengthen the company’s financial flexibility. This brought total cash and investment balance as of Mar 31 to $4.7 billion or net cash of $2.2 billion.

The company had cash and cash equivalents (and short-term investments) of $3.42 billion as of Dec 31, 2019.

Cognizant generated $497 million in cash from operations compared with $938 million reported in the previous quarter.

Notably, the company has no significant debt maturities until 2023. As of Mar 31, 2020, the company had a long-term debt of $2.43 billion, up from $700 million as of Dec 31, 2019.

Free cash flow was $385 million compared with $845 million reported in the previous quarter.

Cognizant bought back 8.5 million shares in the first quarter.

Guidance

Management expects revenues to remain volatile and uncertain, with particular weakness in demand in the second quarter, given additional impact of the ransomware incident of around $50-70 million.

In late April, the company announced a security incident involving its internal systems resulting from a Maze ransomware attack.

The Zacks Consensus Estimate for second-quarter revenues revenues is currently pegged at $4.23 billion, indicating growth of 2.85% from the year-ago quarter’s reported figure.

On Apr 9, Cognizant withdrew its 2020 guidance for revenues and earnings  in anticipation of the long-term impact of coronavirus outbreak on its business.

The company expects adjusted operating margin below 16-17% in 2020 and a strong balance sheet, including net cash of $1.8 billion.

The consensus mark for 2020 revenues is currently pegged at $16.24 billion, indicating a decline of 3.2% from the year-ago quarter.

Zacks Rank & Stocks to Consider

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

NVIDIA Corporation NVDA, Workday Inc WDAY and Okta Inc. OKTA are some better-ranked stocks in the broader computer and technology sector. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NVIDIA, Workday and Okta are set to report quarterly results on May 21, 26 and 28, respectively.

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