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Why Is Cognizant (CTSH) Up 20.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Cognizant (CTSH). Shares have added about 20.5% 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 Up Y/Y, Revenues Miss Estimates

Cognizant Technology Solutions reported third-quarter 2022 non-GAAP earnings of $1.17 per share, which matched the Zacks Consensus Estimate and improved 10.4% year over year.

Revenues of $4.9 billion missed the consensus mark by 2.94%. However, the top line increased 2.4% year over year. At constant currency (cc), revenues grew 5.6%. The reported figure was within management’s revenue guidance of $4.90 billion to $4.94 billion.

The growth in the top line was led by digital revenues, which accounted for 51% of revenues and increased 7% year over year. However, the digital revenue growth slowed down due to FX headwinds, lower inorganic contribution and elevated attrition, particularly in Europe.

Top-Line Details

Financial services revenues (31.3% of revenues) increased 1.6% year over year at cc to $1.52 billion, led by growth in the insurance business. However, clients' focus on cost optimization and the sale of the Samlink subsidiary affected the segment’s revenue growth by 180 basis points (bps).

Healthcare revenues (28.9% of revenues) increased 5.5% year over year at cc to $1.4 billion. The growth was driven by increased demand for its digital services among pharmaceutical clients.

Products and Resources revenues (23.6% of revenues) climbed 8.2% year over year at cc to $1.15 billion, courtesy of strong demand from automotive, logistics, retail and consumer goods clients.

Communications, Media and Technology revenues (16.1% of revenues) were $783 million, up 10.4% from the year-ago quarter at cc, owing to strong demand for digital transformation, 5G networking, IoT and AI solutions.

Region-wise, revenues from North America increased 4% year over year at cc and accounted for 74.6% of total revenues.

Revenues from Europe increased 10.3% from the year-ago quarter at cc and made up 18.2% of total revenues. Revenues from the U.K. and Continental Europe increased 18.7% and 2.9% year over year, at cc, respectively.

Rest of the World's revenues increased 9.3% at cc and represented 7.2% of total revenues.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, decreased 220 bps year over year to 18%.

Cognizant reported a non-GAAP operating margin of 15.5%, which increased 110 bps year over year.

Balance Sheet

CTSH had cash and short-term investments of $2.7 billion as of Sep 30, 2022, compared with $2.3 billion as of Jun 31, 2022.

The company has no significant debt maturities until 2023. As of Sep 30, 2022, Cognizant had a total debt of $636 million, down from $646 million as of Jun 31, 2022.

It generated $1.03 billion in cash from operations compared with $528 million in the previous quarter.

Free cash flow was $953 million compared with $485 million reported in the prior quarter.

In third-quarter 2022, Cognizant returned $300 million through share repurchases and $141 million in dividends to shareholders.

As of Sep 30, 2022, it had $1.5 billion remaining under the current share repurchase program.

Guidance

Fourth-quarter 2022 revenues are expected between $4.72 billion and $4.77 billion, indicating growth of 2-3% on a cc basis.

Revenues for 2022 are now expected to be $19.3 billion, indicating an improvement of 7% on a cc basis.

The company expects the adjusted operating margin to expand by 20 bps to 15.6% for 2022.

Adjusted earnings for 2022 are expected to be $4.43-$4.46 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -8.78% due to these changes.

VGM Scores

Currently, 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 second quintile 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Cognizant has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Cognizant belongs to the Zacks Business - Software Services industry. Another stock from the same industry, Tyler Technologies (TYL), has gained 20.4% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.

Tyler Technologies reported revenues of $473.19 million in the last reported quarter, representing a year-over-year change of +2.7%. EPS of $2.06 for the same period compares with $2.01 a year ago.

For the current quarter, Tyler Technologies is expected to post earnings of $1.75 per share, indicating no change from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

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

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