Cognizant (CTSH) Up 1.9% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Cognizant (CTSH). Shares have added about 1.9% 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 catalysts.

Cognizant Q1 Earnings Beat Estimates, Revenues Up Y/Y

Cognizant Technology Solutions reported first-quarter 2022 non-GAAP earnings of $1.08 per share, which beat the Zacks Consensus Estimate by 3.85% and improved 11.3% year over year.

Revenues of $4.8 billion matched the consensus mark. However, the top line increased 9.7% year over year. At constant currency (cc), revenues grew 10.9%. The reported figure was within management’s revenue guidance of $4.80 billion to $4.84 billion.

The growth in revenues was led by digital revenues, which accounted for 50% of revenues and increased 20% year over year.

Top-Line Details

Financial services revenues (31.7% of revenues) increased 6% year over year at cc to $1.53 billion. Growth in financial services revenues reflects an increase in digital revenues. However, clients' focus on cost optimization and the sale of the Samlink subsidiary impacted the segment revenue growth by 130 basis points.

Healthcare revenues (28.8% of revenues) increased 8.8% year over year at cc to $1.39 billion. The growth was driven by increased demand for its digital services among life science clients.

Products and Resources revenues (23.4% of revenues) climbed 14.9% year over year at cc to $1.13 billion, courtesy of strong demand from retail, consumer goods, travel and hospitality clients and a solid contribution from acquisitions.

Communications, Media and Technology revenues (16.1% of revenues) were $776 million, up 19.9% from the year-ago quarter at cc, owing to strong demand for data services among digital-native companies.

Region-wise, revenues from North America increased 8.7% year over year at cc and accounted for 74% of total revenues.

Revenues from Europe increased 15.6% from the year-ago quarter at cc and made up 18.9% of total revenues. Revenues from the U.K. and Continental Europe increased 26.4% and 6.8% year over year, at cc, respectively.

Rest of the World's revenues surged 22.1% at cc and represented 7.1% of total revenues.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, decreased 90 bps year over year to 17.9%.

Net headcount increased 14.8% year over year. Quarterly annualized attrition was 31%, down from 35% reported in the previous quarter.

Cognizant reported a non-GAAP operating margin of 15%, which decreased 20 bps year over year.

Balance Sheet

Cognizant had cash and short-term investments of $2.3 billion as of Mar 31, 2022, compared with $2.7 billion as of Dec 31, 2021.

The company has no significant debt maturities until 2023. As of Mar 31, 2022, Cognizant had a total debt of $655 million, down from $664 million as of Dec 31, 2021.

It generated $306 million in cash from operations compared with $825 million in the previous quarter.

Free cash flow was $186 million compared with $760 million reported in the prior quarter.

In first-quarter 2022, Cognizant returned $444 million through share repurchases and $143 million in dividends to shareholders.

As of Mar 31, 2022, Cognizant had $1.7 billion remaining under the current share repurchase program.

Guidance

Second-quarter 2022 revenues are expected between $4.90 billion and $4.94 billion, indicating growth of 9.3-10.3% on a cc basis.

2022 revenues are now expected to be $19.8-$20.2 billion, indicating an improvement in the range of 9% to 11% on a cc basis.

The company expects the adjusted operating margin to expand 20 basis points to 30 basis points to 15.6% to 15.7%.

Adjusted earnings for 2022 are expected to be $4.45-$4.55 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Cognizant has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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.

Performance of an Industry Player

Cognizant is part of the Zacks Business - Software Services industry. Over the past month, MSCI (MSCI), a stock from the same industry, has gained 8.6%. The company reported its results for the quarter ended March 2022 more than a month ago.

MSCI reported revenues of $559.95 million in the last reported quarter, representing a year-over-year change of +17%. EPS of $2.98 for the same period compares with $2.46 a year ago.

MSCI is expected to post earnings of $2.73 per share for the current quarter, representing a year-over-year change of +11.4%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.8%.

MSCI has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.

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