>Cognizant (JP MORGAN)

1Q First Look- Strong 1Q, 2Q Guidance Should Ease Concerns on 10+% FY09 Growth Guidance - ALERT

CTSH reported better than expected revenue in 1Q09, and reiterated its FY09 revenue growth guidance of 10%+. More importantly 2Q09 guidance of $760M+ was also ahead of our above consensus expectations, and implies an achievable ~3% sequential growth in the back half of 2009. We think overall results and guidance should ease concerns over achievability of CTSH’s FY10 growth rate. Expected stock reaction: mild positive, despite the recent stock run (up 38% YTD vs. S&P 500 up 0.4%). We continue to prefer it relative to peers given its premium growth. Call at 10:00 AM Eastern, 800-374-0467.

• 1Q09 revenue beat. Actual $746M; JPM Est.: $739M, Consensus: $734M; Guidance: “at least $735M”. Revenue grew at a very solid 16% rate y/y and (1%) q/q, despite a ~1% q/q currency related drag on 1Q growth (JPMe) and continued macro deterioration during the quarter. As a comparison, offshore peers posted revenue declines of (7%)-(4%) q/q on organic basis during 1Q.

• In-line EPS. Actual $0.38; JPM Est.: $0.38; Cons.: $0.37; Guidance: $0.37-$0.38. Relative to our model, $0.02 in operating beat was offset by below-the-line FX loss in other income ($0.01) and lower interest income ($0.01).

• FY09 and 2Q09 growth guidance. CTSH maintained its FY09 revenue guidance of $3.1b+, representing a 10% revenue growth rate. CTSH also issued 2Q09 revenue guidance of $760M+ (vs. JPMe $755M, cons. $749M), representing q/q growth rate of 2%- above offshore peers (INFY (5.4%)-(3.7%), WIT (2%)-(4%)). Reported 1Q09 results and 2Q09 guidance requires an achievable 3% q/q growth through rest of the year to achieve FY guidance. As of now, we expect a slight increase in consensus FY revenue estimates after the call.

• FY09 EPS guidance modestly lowered. CTSH modestly lowered its FY EPS guidance from $1.54+ to $1.53+, which the company attributed to the quarterly non operating FX loss during the quarter. We think modest guidance revision will likely be discounted as it may be attributed to potentially lower interest income and non operating FX loss. Importantly, revision in EPS guidance also indicates that the company is probably not going to cut its reinvestments to manage near term earnings.

• Operating margin upside. 1Q non-GAAP OPM (excl. stock-based comp.) of 20.2% compared with our estimate of 19.8%, and the company's targeted 19%-20% range. We think margins benefited from 1% appreciation in the USD Indian rupee vs. the Indian rupee (~25bps in operating margins) and potential increase in utilization, which was partially offset by the company’s continued reinvestments and pricing.

• We maintain our Overweight rating.

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