Cognizant Earnings: Expertise in AI Deepens With Record Bookings; Raising FVE

Narrow-moat Cognizant CTSH reported second-quarter results in line with our expectations, continuing the strong performance we witnessed in the previous quarter. We are encouraged to see clients’ embrace of Cognizant’s Neuro AI offerings that recorded over 100 active engagements, highlighting the firm’s strong technical knowledge in artificial intelligence. Trailing 12-month bookings also grew 17% year over year to $26.4 billion, the highest level in five quarters. Taking into account the long-term top-line potential as a result of the robust pipeline, we are raising our fair value estimate to $94 per share. Shares increased 8% following the announcement, but still trading significantly undervalued, in our view.

Revenue in the June quarter was flat year over year (in constant currency) at $4.9 billion. The financial services sector fared the worst amid a softer macroeconomic environment, with revenue decreasing 4.8% year over year in constant currency. Products and resources had year-over-year growth of 3.7% in constant currency, mostly driven by recent large deals in automotive. Cognizant also saw strong demand in Europe with revenue up by 6.3% year over year in constant currency, similarly benefiting from Europe companies’ willingness to hire offshore sourcing like wide-moat TCS and narrow-moat Infosys. On the other hand, we believe Cognizant’s trailing 12-month voluntary attrition rate of only 19.9% could help retain its edge in specific verticals including healthcare, further solidifying intangible assets as its moat source.

Non-GAAP operating margin was 14.2%, 40 basis points lower than the previous quarter but within the range of management’s fiscal 2023 guidance of between 14.2% and 14.7%. Management was optimistic about NextGen program’s potential to cut operating costs in the long term, despite its cost of $117 million this quarter. Non-GAAP earnings per share were $1.10, compared with $1.14 in the prior-year quarter.