Did Cognizant beat expectations and is the growth outlook improving?

Revenue of $4.85B came in above the high end of Cognizant's guidance range, and sequential constant-currency growth of 2.1% was the strongest in two years. The company narrowed its full-year revenue guidance to -0.5% to +1.0% in constant currency, which it described as an improved midpoint, and guided Q3 revenue to flat to +1.5% in constant currency. Y/Y revenue still declined, so growth has not yet turned positive on a reported basis.

How is the Belcan acquisition expected to affect Cognizant?

Cognizant agreed to acquire Belcan, a provider of Engineering Research & Development services, for $1.3B in cash and stock, and expects to close it in Q3 2024. The deal adds about 6,500 primarily North American engineers and expands Cognizant's ER&D and IoT/digital engineering capabilities. The Q3 and full-year guidance excludes Belcan, while the full-year outlook assumes about 70 basis points of inorganic contribution from other acquisitions.

What is driving the margin improvement, and what are the remaining costs?

Adjusted operating margin rose 100 basis points year-over-year to 15.2%, which management attributes to its NextGen program, which has funded investments in revenue growth. NextGen restructuring charges were $29M in Q2 and are expected to total about $95M in 2024 and roughly $325M overall under the program. Those charges are excluded from adjusted metrics but are real costs, with a 2024 pre-tax impact of about $0.17-$0.19 per diluted share.

Is Cognizant generating enough cash and returning capital to shareholders?

Q2 free cash flow was $183M, a sharp improvement from negative $32M a year earlier, but year-to-date free cash flow of $199M was far below the prior year's $599M because of a $360M India tax payment in Q1 2024. Net cash declined to $1.58B from $2.00B at year-end 2023, partly reflecting the payment and cash used in acquisitions and capital returns. The company paid $150M in dividends in Q2 and had $1.6B remaining on its buyback authorization.

CTSH 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed July 31, 2024. Cited figures are marked; the original filing is the authoritative source.

Cognizant reported second-quarter 2024 revenue of $4.85 billion^a, down 0.7% year-over-year as reported and 0.5% in constant currency.

That was above the high end of its guidance range and up 1.9% sequentially (2.1% in constant currency), the strongest sequential growth in two years, led by Financial Services and Health Sciences. GAAP operating margin rose to 14.6% from 11.8%, and adjusted operating margin rose to 15.2% from 14.2%. GAAP diluted EPS was $1.14^b versus $0.91, and adjusted diluted EPS was $1.17 versus $1.10.

Trailing-twelve-month bookings were $26.2 billion^c, a 1.4x book-to-bill, and Q2 bookings rose 5% year-over-year. Full-year 2024 revenue guidance was narrowed to a 0.5% decline to 1.0% growth in constant currency, which the company described as an improved midpoint. Adjusted operating margin guidance was held at 15.3%-15.5% and adjusted EPS guidance at $4.62-$4.70.

Third-quarter revenue is guided to $4.89^d-$4.96 billion, or flat to 1.5% growth in constant currency. The guidance excludes the pending Belcan acquisition, which Cognizant agreed to buy for $1.3 billion in cash and stock and expects to close in Q3 2024. The full-year outlook assumes about 70 basis points of inorganic contribution.

Cash generation was weak in the quarter but improved from the prior year. Q2 free cash flow was $183 million, compared with negative $32 million in Q2 2023, but first-half free cash flow of $199 million fell well below $599 million in the prior-year period, largely because of a $360 million India tax payment in Q1 2024. Net cash fell to $1.58 billion from $2.00 billion at December 31, 2023.

Headcount declined by 8,100 sequentially to 336,300, and trailing-twelve-month voluntary attrition fell to 13.6% from 19.9%. The company paid a $0.30 quarterly dividend and continued share repurchases, with $1.6 billion remaining under its authorization. NextGen restructuring charges continue, with about $95 million expected in 2024 and roughly $325 million in total under the program.

02—Key points

Key Highlights

Q2 2024 revenue of $4.85B, down 0.7% Y/Y (down 0.5% in constant currency), above the high end of guidance and up 2.1% sequentially in constant currency
Margin expansion: GAAP operating margin of 14.6% (vs. 11.8%) and adjusted operating margin of 15.2% (vs. 14.2%), with GAAP diluted EPS of $1.14 (vs. $0.91) and adjusted diluted EPS of $1.17 (vs. $1.10)
FY2024 guidance narrowed to revenue of $19.3-$19.5B (-0.5% to +1.0% in constant currency), with adjusted operating margin of 15.3%-15.5% and adjusted EPS of $4.62-$4.70, excluding Belcan
Pending $1.3B cash-and-stock acquisition of Belcan (ER&D services, ~6,500 engineers), expected to close in Q3 2024
Bookings of $26.2B trailing twelve months (1.4x book-to-bill); Q2 bookings up 5% Y/Y
Free cash flow of $183M in Q2 but $199M year-to-date, well below the prior-year first half, which was affected by a $360M India tax payment in Q1 2024; net cash fell to $1.58B from $2.00B at year-end 2023
Headcount down 8,100 sequentially to 336,300 and trailing-twelve-month voluntary attrition down to 13.6% from 19.9%; $0.30 quarterly dividend declared

03—Questions

Frequently Asked Questions

Did Cognizant beat expectations and is the growth outlook improving?
Revenue of $4.85B came in above the high end of Cognizant's guidance range, and sequential constant-currency growth of 2.1% was the strongest in two years. The company narrowed its full-year revenue guidance to -0.5% to +1.0% in constant currency, which it described as an improved midpoint, and guided Q3 revenue to flat to +1.5% in constant currency. Y/Y revenue still declined, so growth has not yet turned positive on a reported basis.
How is the Belcan acquisition expected to affect Cognizant?
Cognizant agreed to acquire Belcan, a provider of Engineering Research & Development services, for $1.3B in cash and stock, and expects to close it in Q3 2024. The deal adds about 6,500 primarily North American engineers and expands Cognizant's ER&D and IoT/digital engineering capabilities. The Q3 and full-year guidance excludes Belcan, while the full-year outlook assumes about 70 basis points of inorganic contribution from other acquisitions.
What is driving the margin improvement, and what are the remaining costs?
Adjusted operating margin rose 100 basis points year-over-year to 15.2%, which management attributes to its NextGen program, which has funded investments in revenue growth. NextGen restructuring charges were $29M in Q2 and are expected to total about $95M in 2024 and roughly $325M overall under the program. Those charges are excluded from adjusted metrics but are real costs, with a 2024 pre-tax impact of about $0.17-$0.19 per diluted share.
Is Cognizant generating enough cash and returning capital to shareholders?
Q2 free cash flow was $183M, a sharp improvement from negative $32M a year earlier, but year-to-date free cash flow of $199M was far below the prior year's $599M because of a $360M India tax payment in Q1 2024. Net cash declined to $1.58B from $2.00B at year-end 2023, partly reflecting the payment and cash used in acquisitions and capital returns. The company paid $150M in dividends in Q2 and had $1.6B remaining on its buyback authorization.

04—Continue

← View all 8-K filings