Cognizant Bookings Drop 7% as Growth Slows: Rapid Earnings Reaction
Key Points
Cognizant’s third-quarter revenue rose 4.6% to about $5.7 billion, but acquisitions and resold third-party products supplied roughly 4 points of that growth.
Per-share gains came from buybacks, not higher profit.
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Cognizant (NASDAQ:CTSH) grew third-quarter revenue 4.6% to about $5.7 billion, but acquisitions and resold third-party products supplied roughly 4 points of that growth. Shares fell about 6% in midday regular trading. Strip out those two sources and the core consulting and outsourcing business barely grew, while bookings fell and per-share gains came from buybacks rather than higher profit.
Key Numbers
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- Revenue: about $5.7 billion, up 4.6% year over year
- Third-quarter bookings: down 7% year over year
- Operating margin: 15.4% GAAP, down 0.6 points; 16.3% adjusted, up 0.3 points
- Diluted EPS: $1.39 GAAP versus $0.56; $1.49 adjusted versus $1.39
What It Means
Acquired revenue isn't new demand, and resold hardware and software carries thin margins and doesn't recur the way service contracts do. Underneath, the weakness is broad: Health Sciences and Products and Resources, which together make up more than half of revenue, both shrank. Financial Services, up 12%, is the one segment pulling real weight.
Bookings are the pipeline for next year's revenue, so the quarterly drop matters more than the trailing 12-month total, which still grew. Management's fourth-quarter outlook of 3.2% to 4.7% constant-currency growth points to further slowing, and that range likely still leans on acquired revenue.
The earnings growth is financial, not operational. Adjusted net income slipped slightly, so the adjusted EPS gain came entirely from a share count about 8% smaller. Cognizant is funding buybacks and acquisitions partly with new borrowing, even as free cash flow fell. GAAP EPS more than doubled only because last year's quarter carried a one-time tax charge; pre-tax income actually dipped.
What to Watch Next
Watch whether fourth-quarter bookings rebound and whether growth excluding acquisitions and resale picks up. Also check whether free cash flow recovers as rising receivables turn into cash.
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David Kretzmann has no position in any of the stocks mentioned. The Motley Fool recommends Cognizant Technology Solutions. The Motley Fool has a disclosure policy.
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