Cognizant Earnings: Delayed Decision-Making Persists, but Bookings Strong; Shares Are a Solid Buy

Cognizant CTSH posted solid results for the first quarter of the year, surpassing our top- and bottom-line expectations. Guidance for the year was a more mixed story. While we thought revenue was underwhelming, profitability appears to be better than we were bracing for. Accounting for the blended guide, we are maintaining our fair value estimate of $91 per share as we believe that there is no reason for Cognizant not to benefit from long-term digital transformation trends to a similar degree as its peers. Shares are up 5% upon results, but the stock still has a long way to go to reach our fair value estimate, in our view, leaving plenty of opportunity for investors to invest in this narrow-moat stock.

In the first quarter, Cognizant’s total revenue remained flat on a year-over-year basis at $4.8 billion. Cognizant, like its most immediate peers, is experiencing continued delays in decision-making as a result of the macroeconomic environment. Overall, segment performance was bookended by financial services and healthcare. Financial services’ revenue decreased by 3% year over year—affected by North American weakness. Yet, on a bright note the segment’s bookings growth outpaced Cognizant’s total bookings in the quarter, which was strong. In fact, Cognizant’s trailing 12 months book/bill is a healthy 1.3, giving us confidence in future demand for Cognizant offerings. In contrast to weakness in financial services, healthcare revenue topped all segments, growing by 3% year over year and booked a major deal covering claims processing for over one million members at Horizon healthcare services.

Non-GAAP operating margins decreased slightly in the quarter to 14.6% compared with 15% in the prior-year period. As a result, Cognizant posted non-GAAP EPS of $1.11.