Cognizant reported very strong results for 4Q17, beating on top and bottom line, issuing solid guidance and significantly increasing their dividend. The dividend, which was just initiated in 2Q17, was increased by 33% (increase driven by tax reform). Revenues were up 10.6% and EPS was up 18.4%, excluding a one-time repatriation tax expense of $617m. Full year FCF was $2.1B, up almost 57% YoY. They returned all of their FCF to shareholders through share repurchases ($1.9B) and dividends ($265m).
Current Price: $76 Price Target: $76
Position Size: 2.3% TTM Performance: +43%
Cognizant is well positioned for the accelerating shift to digital:
- In recent years, the news has been dominated by the rise of digital natives like Facebook, Amazon, Netflix and Google
- Going forward, they say previously dominant companies rise as the “new generation of digital heavyweights.”
- While a digital transformation is remaking and disrupting business models, Cognizant is helping legacy players adapt.
- Digital related revs grew 30% in 2017, accounted for 27% of revenue and is higher margin.
Thesis intact, highlights from the quarter:
- 4Q17 Revenue of $3.83B up 10.6%.
- Consulting & Technology Services revenue up 10.2%.
- Outsourcing Services revenue up 11%.
- About 40% of their revenue from fixed price contracts – continuing to shift mix of business towards this.
- Employee metrics reflect improving resource alignment
- Annualized attrition was 17.9%; (460) bps lower than 3Q17
- Utilization: Offshore (excluding trainees) increased to 83%; On-site was 92%
- They acquired Netcentric and Zone in 4Q17 to expand their digital marketing capabilities.
Results across all segments were solid with the best results in the Communications, Media & Technology segment of +18%:
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- Financial Services saw strength with insurance and mid-tie banking clients which offset continued weakness with larger banking clients (notably, they are starting to see recovery).
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- Healthcare saw strong demand from payer clients (e.g. insurers). Shift from fee-for-service to value based care is driving demand as it requires data-driven insights and increased digital collaboration.
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- Products & Resources saw growth in manufacturing and logistics clients, offsetting weakness in retail
- Communications, Media & Technology had sold growth across all sectors.
For the full year, they saw solid results across all regions except the UK which was down 2%.
First Quarter & Full Year 2018 Outlook
The Company is providing the following guidance:
- Q1 2018 revenue $3.88B to $3.92B, street was at $3.88B.
- Q1 2018 EPS at least $1.04, street was at $1.01.
- Full year 2018 revenue $16B to $16.3B, bracketing street estimate of $16.2B.
- Full year 2018 EPS at least $4.53, street was at $4.35.
- Tax rate 24%
- $0.80 dividend, raised 33%, trading at a 1% yield.
- Expecting continued share repurchases.
Investment Thesis:
- With a FCF yield of 5%, 1% dividend yield, secular growth tailwinds, strong balance sheet and ROIC running in the mid-20’s, the stock is still cheap.
- They are well positioned to benefit from the “SMACK” megatrend (Social, Mobile, Analytics, Cloud, and Key disruptors) which is driving corporations to rethink the way they do business.
- Digital readiness and cloud computing are reshaping client demand for IT services. Cognizant is well positioned to benefit from this shift and trades at an attractive valuation.