Companies in every industry know that making the most of their information technology resources is vital to their success. To get help keeping up with the rapid pace of advances in the tech industry, many enterprises turn to Cognizant Technology Solutions (CTSH -0.37%) and its expertise with IT systems and solutions. Yet even though Cognizant's long-term growth has been extremely rewarding to shareholders, the company's performance more recently has raised questions about whether Cognizant can keep benefiting from the trends that made it the industry powerhouse it's become.
Coming into Tuesday's third-quarter financial report, Cognizant investors expected to see solid gains in earnings and sales from the tech consultant. The IT consultant was largely able to deliver on those expectations, but some still weren't satisfied about the slowdown that the company saw in a key sector as well as the somewhat lackluster guidance it gave for the remainder of the year.
Image source: Cognizant.
Moving up -- slowly
Cognizant's third-quarter results were largely favorable, although some weren't satisfied with the long-term trends that remained in place. Revenue climbed 8.3% to $4.08 billion, which matched up well with what most of those following the stock were looking to see. Despite a 4% hit to GAAP net income due to currency impacts that resulted in bottom-line profit of $477 million for the period, adjusted earnings of $1.19 per share topped the consensus among investors for $1.13 per share.
For the most part, Cognizant saw solid contributions from most of its business segments. The most successful division in terms of revenue growth was the communications, media, and technology group, which enjoyed 17% gains from the third quarter of 2017. Similarly, the products and resources division posted a nearly 12% rise in segment revenue. Even on the healthcare front, which is Cognizant's second most important category, sales climbed almost 10%, sustaining healthy levels of overall growth.
But once again, Cognizant wasn't able to get the growth it wanted from its key financial services segment. There, top-line growth was limited to 2.6%, and although the unit remains the most important contributor to overall revenue, its lagging growth rates have allowed smaller segments to catch up considerably over the past couple of years.
Looking at Cognizant's global operations, the company still got the bulk of its revenue from North America and Europe. Sales in North America were up 7.5% from year-earlier levels, and after a long period of underperformance following the Brexit decision, U.K. revenue at Cognizant returned to a more attractive 8% growth rate. In the rest of Europe, sales were up almost 22%, and that helped to offset the stagnant 0.4% rise in revenue for Cognizant's rest-of-world segment -- the one that took the biggest hit from currency-related moves in the Indian rupee versus the U.S. dollar.
CEO Francisco D'Souza was generally upbeat with the news. "Cognizant delivered strong third-quarter results in three of our four business segments," D'Souza said, and "we made continued progress in our shift to digital by building new capabilities and helping our clients excel with digital services and solutions." The CEO highlighted the importance of helping its clients give their end-users the digital experience they now expect.
Can Cognizant grow faster?
Cognizant is also confident that its long-term strategy will result in building momentum. Even in financial services, the company said that banking and insurance saw modest growth, and expansion of digital services has resulted in returning growth with large banking clients. Cognizant also expects to use its healthy balance sheet to pursue strategic moves to bolster its capabilities, including some recently announced acquisitions that will add expertise in cloud-based processes and software engineering.
Once again, though, Cognizant wasn't able to make all of its investors happy about its immediate future prospects. Guidance for the fourth quarter included sales projections of between $4.09 billion and $4.13 billion, which was slightly less than the $4.17 billion consensus among investors, and adjusted earnings of at least $1.05 per share seemed considerably below the $1.13 that those following the stock want to see next quarter. Full-year calls for $16.09 billion to $16.13 billion in sales and adjusted earnings of $4.50 per share or more were similarly conservative.
Cognizant shareholders weren't entirely pleased with the results, and the stock fell 4% in pre-market trading following the announcement. Ideally, what investors would like to see from Cognizant is more sustained growth, especially in the lagging financial services industry. Until they get it, it'll be tough for the IT consultant to rebound from its sluggish performance lately.
