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Digital Shift Keeps Pushing Cognizant Technology's Business Forward

By Dan Caplinger - Nov 1, 2017 at 8:53AM

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Find out how one key strategy is helping the IT services provider.

The technology industry has been innovating at a faster pace than ever before, and it's a major challenge for businesses to keep up with changes quickly enough to take advantage of new capabilities while staying ahead of their competitors. Cognizant Technology Solutions (CTSH 0.44%) provides the information technology support that businesses need in order to use tech-related tools to maximum advantage, and the IT specialist's recent focus on what it calls the digital at scale transformation has paid off with solid results in past quarters.

Coming into Wednesday's third-quarter financial report, Cognizant investors were expecting that the tech consultant would be able to keep growing at a healthy pace. The results showed consistent progress along its long-term growth trajectory, and Cognizant remains confident in its capacity to help more clients upgrade their IT systems. Let's take a closer look at Cognizant to see how it's doing and what's ahead.

Glass wall with Cognizant Accelerator glazed on its surface, with a conference table beyond.

Image source: Cognizant Technology Solutions.

Cognizant moves higher

Cognizant's third-quarter results were modestly upbeat, which is a consistent theme from quarterly reports over the past year. Revenue rose more than 9% to $3.77 billion, matching the consensus growth forecast among those following the IT consultant. Net income came in at $495 million, up 11% from the year-ago quarter, and adjusted earnings of $0.98 per share were better than the $0.95 per share figure that most investors were expecting to see.

Cognizant has seen its four primary business units converge in terms of revenue, and that trend continued during the third quarter. The small communications, media, and technology segment experienced the strongest growth rate, with an 18% sales gain compared to the third quarter of 2016. The products and resources unit also saw outpaced segment revenue growth of 14%, making up about a fifth of Cognizant's total business. Year-over-year gains of 9% on the healthcare segment's top line were consistent with the overall company's growth, but the financial services division lagged, posting just a 4% rise in segment revenue. Sequential gains were more measured, with all four segments within a range of 1% to 4% growth.

Cognizant also saw stronger performance overseas than in the core North American market. European revenue was up 17%, bolstered in part by a rebound from the U.K., which finally returned to year-over-year growth after fully integrating the negative impact of the Brexit vote into its operations. Outside the U.K., Cognizant saw revenue in Europe jump by more than a third, and a 20% rise in the rest of the world dwarfed gains of just 6.7% in North America.

CEO Francisco D'Souza put the results in context. "We are making consistent progress," D'Souza said, "in executing the plan to accelerate our shift to digital services and solutions." The CEO sees the digital at scale initiatives as reflecting Cognizant's ability to help its clients modify their business, operating, and technology practices in a favorable way.

What's ahead for Cognizant?

Cognizant expects its client relationships to expand in the future. As the consultant gets to know its customers better, it can fully understand their priorities and find the customized solutions to meet those priorities.

Those efforts are likely to result in financial performance that's consistent with what investors expect, at least for the immediate future. Cognizant's guidance for the fourth quarter includes revenue of between $3.79 billion and $3.85 billion, and adjusted earnings should come in at or above $0.95 per share. For 2017 as a whole, Cognizant narrowed its revenue guidance to the upper portion of its range from three months ago, and the company now believes that it will bring in between $14.78 billion and $14.84 billion in sales. A minimum of $3.70 per share in adjusted earnings would be $0.03 higher than what it previously expected.

Cognizant investors have enjoyed a strong run that has added more than 40% to its share price over the past 12 months. Yet if the technology consultant can take full advantage of favorable conditions in the industry and serve a wider customer base, then its fundamental business could see even more spectacular growth in the future.

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