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Cognizant (CTSH) Up 4.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Cognizant (CTSH). Shares have added about 4.1% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Cognizant's Q2 Earnings Beat, Revenues Increase Y/Y

Cognizant reported second-quarter 2021 non-GAAP earnings of 99 cents per share that beat the Zacks Consensus Estimate by 3.1% and increased 20.7% year over year.

Revenues of $4.59 billion beat the consensus mark by 3% and increased 14.6% year over year. At constant currency (cc), revenues grew 12%. The top line comfortably surpassed management’s revenue guidance range of $4.42-4.46 billion.

Digital revenues accounted for 44% of revenues and increased 20% year over year.

Top-Line Details

Financial services revenues (32.8% of revenues) increased 4.8% year over year at cc to $1.50 billion. Increase in digital revenues and strong contribution from acquisitions drove growth.

Healthcare revenues (28.9% of revenues) increased 13.4% year over year at cc to $1.33 billion, driven by growth in life sciences businesses and strong demand for the company’s integrated software solutions from healthcare clients.

Products and Resources revenues (23% of revenues) increased 17.8% year over year at cc to $1.06 billion due to strong demand from manufacturing, logistics, energy and utilities clients, as well as solid contribution from acquisitions.

Communications, Media and Technology revenues (15.3% of revenues) were $703 million, up 17.9% from the year-ago quarter at cc. Acquisitions and increased demand from technology clients drove growth.
 
Region-wise, revenues from North America increased 11.8% year over year at cc and represented 73.5% of total revenues.

Revenues from Europe increased 10.2% from the year-ago quarter at cc and accounted for 19.3% of total revenues. Revenues from the United Kingdom and Continental Europe increased 16.4% and 5.6% year over year, at cc, respectively.

Rest of the World revenues rose 19.1% at cc and represented 7.2% of total revenues.

Operating Details

Selling, general & administrative (SG&A) expenses, as a percentage of revenues, increased 140 bps year over year to 19.2%.

Net headcount increased 7.1% year over year. Quarterly annualized attrition was 31%, up from 21% reported in the previous quarter.

Cognizant reported non-GAAP operating margin of 15.2%, which expanded 110 bps year over year.

Balance Sheet

Cognizant had cash and cash equivalents (and short-term investments) of $1.85 billion as of Jun 30, 2021, compared with $2.16 billion as of Mar 31, 2021.

The company has no significant debt maturities until 2023. As of Jun 30, 2021, Cognizant had a total debt of $683 million, down from $692 million as of Mar 31, 2021.

Cognizant generated $541 million in cash from operations compared with $181 million reported in the previous quarter.

Free cash flow was $466 million compared with $93 million reported in the previous quarter.

In second-quarter 2021, Cognizant returned $296 million through share repurchases and $127 million in dividends to shareholders.

As of Jun 30, 2021, Cognizant had $2.3 billion remaining under the current share-repurchase program.

Guidance

Third-quarter 2021 revenues are expected between $4.69 billion and $4.74 billion, indicating growth of 10 on a cc basis.

Full-year 2021 revenues are now expected between $18.4 billion and $18.5 billion (raised from the previous guidance range of $17.8-$18.1 billion, indicating growth of 5.5-7.5% on a cc basis), indicating growth of 9-10% on a cc basis.

The company expects adjusted operating margin to be 15.4% in 2021 compared with 14.4% reported in 2020. Cognizant expects operating margin to expand sequentially in the third quarter, but decline quarter over quarter in the fourth quarter.

Full-year 2021 adjusted earnings are expected to be in the range of $4-4.06 per share (raised from $3.90-4.02 per share).

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How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Cognizant has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, 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 trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Cognizant has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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