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Cognizant (CTSH) Q1 Earnings Beat Estimates, Revenues Down Y/Y

Cognizant Technology Solutions CTSH reported first-quarter 2023 non-GAAP earnings of $1.11 per share, which beat the Zacks Consensus Estimate by 5.71% and increased 2.8% year over year.

Revenues of $4.81 million beat the consensus mark by 1.60%. The top line decreased 0.3% year over year but increased 1.5% at constant currency (cc). Acquisitions contributed 100 basis points (bps) to top-line growth.

Top-Line Details

Financial services revenues (30.7% of revenues) decreased 1.4% year over year at cc to $1.48 billion.

Health Sciences revenues (29.8% of revenues) increased 3.5% year over year at cc to $1.43 billion.

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise

Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise
Cognizant Technology Solutions Corporation Price, Consensus and EPS Surprise

Cognizant Technology Solutions Corporation price-consensus-eps-surprise-chart | Cognizant Technology Solutions Corporation Quote

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Products and Resources revenues (23.2% of revenues) increased 1.4% year over year at cc to $1.12 billion. Continued strength among logistics, utility, and travel and hospitality customers benefited the segment’s top-line growth.

Communications, Media and Technology revenues (16.3% of revenues) were $785 million, up 3.9% from the year-ago quarter at cc.

Region-wise, revenues from North America decreased 0.5% year over year at cc and accounted for 73.7% of total revenues.

Revenues from Europe increased 9.7% from the year-ago quarter at cc and made up 19.5% of total revenues. Revenues from the U.K. and Continental Europe increased 14.4% and 5.1% year over year at cc, respectively.

Rest of the World revenues increased 0.9% at cc and represented 6.8% of total revenues.

Operating Details

Selling, general & administrative expenses, as a percentage of revenues, decreased 50 bps year over year to 17.4%.

Total headcount at the end of the first quarter was 351,500, down 3,800 sequentially but up 11,100 year over year.

Voluntary attrition- Tech Services, on a trailing 12-month basis, declined to 23% from 26% in the fourth quarter of 2022 and 30% in the first quarter of 2022.

Cognizant reported a non-GAAP operating margin of 14.6%, which contracted 40 bps year over year.

Balance Sheet

Cognizant had cash and short-term investments of $2.48 billion as of Mar 31, 2023 compared with $2.2 billion as of Dec 31, 2022.

As of Mar 31, 2023, the company had a total debt of $646 million, unchanged from the figure reported as of Dec 31, 2022.

It generated $729 million in cash from operations compared with $702 million in the previous quarter.

Free cash flow was $631 million compared with $612 million reported in the prior quarter.

In the first quarter of 2023, the company returned $200 million through share repurchases. As of Mar 31, 2023, it had $2.6 billion remaining under the current share repurchase program.

NextGen Initiative

In the reported quarter, Cognizant initiated the NextGen program, which aims at improving operating efficiency. It expects to record costs worth roughly $400 million with approximately $350 million of such costs anticipated in 2023 and $50 million in 2024.

This cost mainly comprises employee severance ($200 million) and other costs related to nonbillable and corporate personnel, which Cognizant expects to mostly incur in 2023.

Moreover, approximately $200 million of these costs are related to the consolidation of office space, with approximately $150 million to be incurred in 2023 and the remaining $50 million in 2024.

The NextGen program is expected to generate meaningful cost savings beginning 2024. By 2025, Cognizant expects to reduce its annual real estate costs by approximately $100 million versus 2022.

The company expects the personnel-related actions of this program to impact roughly 3,500 employees or approximately 1% of its workforce.

Cognizant expects this program to help deliver 20-40 bps of margin expansion in 2024.

Guidance

Second-quarter 2023 revenues are expected between $4.83 billion and $4.88 billion, flat to down 1% on a cc basis. Unfavorable forex is expected to hurt the top line by 60 bps while acquisitions are expected to contribute 100 bps.

For 2023, revenues are expected to be $19.2-$19.6 billion, indicating a decline of 1% to growth of 1% at cc. Adjusted operating margin for 2023 is expected between 14.2% and 14.7%.

Adjusted earnings for 2023 are expected between $4.11 and $4.34 per share.

Zacks Rank & Stocks to Consider

Currently, Cognizant has a Zacks Rank #4 (Sell).

BILL Holdings BILL, Fortinet FTNT and DigitalOcean DOCN are some better-ranked stocks that investors can consider in the Zacks Computer & Technology sector. While Fortinet sports a Zacks Rank #1 (Strong Buy), both BILL and DigitalOcean carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BILL Holdings shares have declined 27.9% year to date. BILL is set to report its first-quarter 2023 results on May 4.

Fortinet shares have gained 24% year to date. FTNT is set to report its first-quarter 2023 results on May 4.

DigitalOcean shares have gained 23% year to date. DOCN is set to report its first-quarter 2023 results on May 9.

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