Tag Archives: ctsh

Xerox Stock Rebuilds; Q1 EPS Rise Expected, But Not Better Revenue

Take your eye off iconic copier maker Xerox ( XRX ) for too long — heck, Xerox stock had done little more than fall since December 2014 — and you would have missed its run-up to Tuesday’s eight-month high at 11.39, up 34% since touching a nearly three-year low in January at 8.48. Xerox stock closed Friday at 11.16, flat for the session. Credit Suisse analyst Kulbinder Garcha doesn’t see much upside potential, giving Xerox a 12-month price target of 11 and a neutral rating in a research note issued Friday. He does see more first-quarter earnings in Xerox, modeling 1 cent more adjusted EPS than Wall Street’s 23-cent consensus, which would be up 10% from the year-earlier quarter. Xerox is scheduled to release Q1 earnings before Monday’s open. But Garcha sees slightly smaller sales than the $4.24 billion consensus of analysts polled by Thomson Reuters. That Q1 consensus would be a 5.1% decline from 2015’s Q1 sales and Xerox’s 17th consecutive quarter of shrinking year-on-year revenue, albeit slower shrinkage than the 8% decline in Q4 and 10% contraction in Q3. The rise in Xerox stock may be tied to anticipation over its imminent split into two companies: the legacy copier/printer/office machine business and the business-process outsourcing (BPO) spinoff. Based on $18 billion in 2015 sales, down 8% from 2014, the business-machine side would wind up with about $11 billion a year in sales, and the outsourcing spinoff about $7 billion, Xerox CEO Ursula Burns said when she announced the split on Jan. 29, concurrent with the Q4 earnings release. Inspired by activist investor Carl Icahn, Burns said the breakup would unlock value in both companies. Icahn would get three seats on the new BPO board, while Xerox would get six. BPO sales, grouped currently as services under Xerox, is a “show me story,” Credit Suisse’s Garcha said. “Management is trying to transition the business away from low-margin to more value-added business,” he wrote in a research note. “However, we think management has to show consistent improvement and deliver on results to regain investor confidence.” Garcha anticipates a Q1 decline of 5.4% to $2.4 billion in services revenue. As for the so-called “document technology” core hardware, software and document management businesses, Garcha estimates that about $1.6 billion of Xerox’s annual cost of goods sold are “yen-denominated,” coming from the Fuji Xerox joint venture (75% owned by Fujifilm ( FUJIY )). With the yen up about 9% year to date, foreign exchange “will impact margins,” but less than was earlier expected, Garcha said. For Q1, Garcha forecasts document tech segment revenue fell 12% to $1.6 billion. Not all of Xerox outsourcing will be part of the BPO spinoff. Document outsourcing, which fell 2% to $852 million in Q4 revenue, will stay with the larger portion of the split, a Xerox spokesman told IBD. Effective April 1, Xerox borrowed $1 billion unsecured from a consortium of seven banks to be repaid within a year or upon execution of the spinoff, whichever comes first. Xerox says the spinoff should be complete before year-end. With a market cap of $11.3 billion, Xerox is the fourth-largest member of IBD’s Computer-Hardware/Peripherals industry group, following Canon ( CAJ ), the newly reorganized HP Inc. ( HPQ ), and Fujifilm. Xerox carries a middling 66 IBD Compositing Rating. Its formidable BPO rivals, Cognizant Technology Solutions ( CTSH ) and Infosys ( INFY ) rate better, with CRs of 75 and 80, respectively.

Infosys Outlook Might Impress Wall Street More Than Q4 Improvement

Wall Street seems to be more interested in what the Indian outsourcing companies will do next than how they performed previously. No surprises are expected when one of the biggest, Infosys ( INFY ), reports its fiscal 2016 fourth-quarter earnings way after the close Thursday, scheduled for 11:45 p.m. ET — or about 9:15 a.m. Friday in Bangalore. The consensus of analysts polled by Thomson Reuters suggests Infosys will report earnings up 5% to 23 cents minus items, on revenue up 13.6% to $2.43  billion for the quarter ended March 31. That would be its best revenue growth rate in six quarters and its best earnings growth in the last five quarters. Robert W. Baird analyst David Koning sees the EPS consensus as “reasonable,” but anyone expecting a tad above consensus for revenue “seems aggressive based on historical trends,” he said in a Tuesday research note. Baird rates Infosys stock neutral, with a 19 price target. Cowen analyst Bryan Bergin, who rates the stock as market perform with an 18 price target, says the company’s Q4 “results tend to be seasonally soft, and we don’t expect any surprises there with low single-digit sequential revenue improvement, modeled at 1.4% (quarter to quarter in U.S. dollars, or about 2% in constant currency).” Instead, Bergin said, “the primary focus will be its FY’17 guide. In sum, expectations are somewhat elevated going into this print, given INFY’s recent momentum. We think a year-on-year top-line (in constant currency) growth midpoint of (about) 12% is benchmark for expectations. (We model a foreign-exchange headwind of 2.5%.) Its guide on operating margin will also be a key focus; we think at worst, a flat operating margin target range of 24%-26% is built into expectations, given its ambitious long-term target of 30% by 2020.” Analysts expect fiscal 2017 EPS of 98 cents minus items on revenue of $10.41 billion, up from an expected 90 cents and $9.46 billion, respectively, the previous year. For fiscal 2015, Infosys earned 87 cents per share minus items on $8.61 billion. Will Infosys Impact Cognizant? Analyst Koning seems as interested in what Infosys’ guidance does for rival Cognizant Technology Solutions ( CTSH ) as what it does for Infosys. He issued a separate research note just on Infosys’ impact on Cognizant. “CTSH likely holds up OK, even if INFY guides fiscal 2017 revenue a bit below the Street,” Koning said. “When INFY provided initial full-year guidance below the Street in each of the last three years, INFY was down 5%-21%, but CTSH was (down) 3% to (up) 1%.” Cognizant stock was flat in early trading in the stock market today, near 59.50. Infosys stock was down a fraction, near 18. Cognizant is trading 14% off a 69.80 record high set Oct. 28. Infosys is trading 6% off a 16-year high of 19.49 set April 4. While Infosys earns a strong IBD Composite Rating of 83 — meaning it’s outperforming 83% of S&P 500 companies on earnings, sales, institutional ownership, stock activity and other metrics — Cognizant rates even better with an 87. Bigger tech outsourcer Accenture ( ACN ) rates an 89, while the best in the group are the relatively small CGI Group ( GIB ) (with a 92 CR) and CDW ( CDW ) (with a 91). As organizations look to digitize their operations and move to the cloud, Cognizant, Infosys and other tech outsourcers are becoming increasingly important as a way to start or accelerate the process, as a means to contract-out process management entirely and as a way to limit or reduce expenses. Service-level agreements “are changing to reflect this (conversion from business-process outsourcing to business-process management ), becoming more business-outcome-focused and leading the market to shift from a pure RFP (requests for proposal) procurement approach to a managed-service, end-to-end solution offering,” Cowen’s Bergin said in an April 1 research note.

Cognizant Nears, ExlService Hits Record As Outsourcing Stocks Rise

You can almost hear the conversation: “That team did such a great job on that project,” said CEO Joe Fiction, “let’s give them the entire product line to operate and save some dough.” Converting traditional business process outsourcing (BPO) into business process management (BPM) framed the Indo-U.S. BPO Summit this week in Orlando, Fla., sponsored by the Indo-American Chamber of Commerce and India’s National Association of Software and Services Companies ( NASSCOM). Billed as a first-of-its-kind conference, the timing couldn’t have been better, as many of the outsourcers were trading near record highs after a slow start to the year. Service-level agreements “are changing to reflect this (BPO-to-BPM conversion), becoming more business-outcome-focused and leading the market to shift from a pure RFP (requests for proposal) procurement approach to a managed-service, end-to-end solution offering,” said Cowen analyst Bryan Bergin in a research note Friday. “This drives the shift from BPO to BPM and a strategic partner position. The effect of this evolution increases the stickiness of the revenue stream but also ties the fortunes of the provider even closer to that of their client base.” Many BPOs were represented at the show, including  Genpact ( G ), Wipro ( WIT ), Convergys ( CVG ) and WNS Holdings ( WNS ). But Bergin focused on Cognizant Technology Solutions ( CTSH ) and ExlService Holdings ( EXLS ) for their “industry depth and value-added service approaches that position each to win in this evolving landscape,” he said. Cognizant stock was up a fraction in afternoon trading in the stock market today , near 63 but still 10% off its Oct. 28 record high. ExlService stock was up more than 1%, near 52.50, just off of Wednesday’s all-time high of 52.92. Wipro stock was up 1%, 5% off its 52-week high. Genpact stock hit a record high Friday and was up nearly 1.5% Friday afternoon. WNS was up 3.5% Friday, just 7% from an eight-week high touched Nov. 2. Infosys ( INFY ) stock was up more than 1% and near a five-year high. Hewlett Packard Enterprise ( HPE ) stock was up 3% and hit a new record high Friday. “We favor EXLS for its traditional BPO model pairing with an operations consulting business and rapidly growing analytics offering,” Cowen’s Bergin said. “CTSH is building its BPM via a vertical-specific approach, leveraging its scale and expertise in health care and financial services to drive its (approximately) $1 billion business that is growing faster than the company average. We favor such approaches in the evolving BPM landscape.” Cowen carries ExlService with an outperform rating and a 63 price target. Cowen too rates Cognizant as outperform, with a 65 target. ExlService is a member of IBD’s Commercial Services-Outsourcing industry group, which hit a record high Friday. Cognizant is a member of IBD’s Computer-Tech Services industry group, which was trading 9% off its all-time high set Nov. 5. Both companies are near the top of their heaps for overall stock and operating performance, with ExlService earning an IBD Composite Rating of 98 out of a best possible 99, and Cognizant a 93 CR.