Cognizant Technology Solutions Corp (NASDAQ:CTSH) Q2 Guidance Disappoints

Q2 Outlook

Cognizant shares closed down by 5% after the company said it expects its Q2 revenue to range between $4 billion and $4.04 billion, against an average estimate of $4.03 billion. The company also said it expects earnings to come in at $1.09 a share, against consensus estimates of $1.12 a share.

For the full year, Cognizant raised its low-end revenue forecast to $16.05 billion from $16.3 billion, which is below the average street estimate of $16.23 billion. The company expects full-year earnings to be at least $4.47, still below the consensus estimate of $4.55 a share.

“Cognizant has built the capabilities and scale to help clients digitize their offerings, create personalized customer experiences, instrument their operations, and modernize their IT infrastructure. This digital-at-scale value proposition is winning with clients and positioning us well to deliver a strong 2018,” said Francisco D’Souza.

Cognizant has warned that it expects to pay higher taxes than previously thought, something that could hurt earnings going forward. Newly adopted U.S Tax Law limits the amount of foreign tax credit that Cognizant can receive from taxes paid overseas. Much of the company’s operations are oversee supported by a workforce of about 260,000 in India.

 Q1 Results

The forecast did not go well with investors even on the company reporting double-digit growth in the first quarter  Revenue in Q1 came in at $3.91 billion, in line with management guidance of $3.88-$3.92 billion also representing 10.3% year over year growth.

During the quarter, the company adopted a new revenue standard dubbed, ASC 606, that positively impacted revenue by $21 million, earnings by 4 cents and income from operations by $29 million.

Financial service made up of insurance, banking and transaction processing accounted for 37% of the total revenues at $1.46 billion. The 6.2% year-over-year increase was because of growth in insurance companies and mid-tier banks that helped offset softness on the legacy business.

Digital revenues increased 27% and accounted for 29% of the total revenues as the company added seven new strategic customers. Communications, Media and Technology Revenues came in at $494 million accounting for 13% of the total revenue. Product and services revenue at $821 million accounted for 21% as healthcare revenues increased 11.8% to $1.12 billion to account for 11.8% of the total revenues.

Earnings, on the other hand, came in at $1.06 a share, beating estimates by a penny and representing a 26.2% year-over-year growth. Cognizant reported an operating margin of 20.3%, which represents a 140bps improvement from a year ago. The Company exited the quarter with cash and cash equivalent of $4.83 billion.

The company has since declared a $0.20 per share quarterly dividend that is to be paid on May 31, 2018, to shareholders on record as of May 22, 2018. During the first quarter, the company also announced a $300 million share repurchase program.