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A Tough Quarter Forces Cognizant to Cut Its 2019 Outlook

By Dan Caplinger - May 3, 2019 at 9:44AM

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The IT consultant sees weaker business from financials and healthcare clients.

Cognizant Technology Solutions (CTSH -0.61%) is one of many companies that work with clients to optimize their tech capabilities. Given how crucial it's become to put the power of cloud computing, data analytics, and information management to work, Cognizant has seen extremely strong growth in recent years, and that's helped it become a leader among tech consultants.

Coming into Thursday's first-quarter financial report, Cognizant investors were prepared to see some pressure on earnings but wanted solid gains in sales. Unfortunately, Cognizant's results indicated that the future might not be as bright for the company as previously expected, and that could create headwinds that will last throughout 2019.

Cognizant logo in blue.

Image source: Cognizant.

Cognizant goes through hard times

Cognizant's first-quarter results didn't live up to expectations. Revenue climbed just 5% to $4.11 billion, falling short of the $4.17 billion that most of those following the stock wanted to see on the top line. Net income of $441 million plunged 15% from year-ago levels, and the resulting adjusted earnings of $0.91 per share didn't come close to matching the $1.04-per-share consensus forecast among investors.

From a geographical standpoint, Cognizant saw relatively uniform performance. North American sales were up 5%, and although Europe saw double-digit percentage gains in local currency terms, the strong dollar limited reported sales increases to just 7.3%. The rest-of-world segment saw flat revenue from year-ago levels, also suffering the impact of currency headwinds.

Cognizant's weakness came largely from its biggest business segments. The financial services unit saw an outright drop in segment sales, which fell almost 2%, as soft results from big banking and insurance clients weighed on performance. Healthcare managed a modest gain of almost 4%, but both of those businesses experienced deterioration in their growth rates. Double-digit gains of 11% in products and resources and 17% in the communications/media/technology segment were more encouraging, but they were still 1 to 3 percentage points weaker than their corresponding growth three months ago.

New CEO Brian Humphries gave more color on the poor results. "Cognizant's growth and performance in the quarter leaves room for improvement," Humphries said, as "while I am encouraged by our client centricity, our employees' winning spirit, and our innovation, we are not yet delivering against the market opportunity." The CEO pointed to the need to improve execution in order to restore Cognizant to a healthier growth trajectory.

Can Cognizant bounce back?

Cognizant is optimistic that it can get its momentum back. CFO Karen McLoughlin highlighted part of the recovery strategy, saying, "Over the coming quarters, we intend to bring our cost structure closer in line with our revised revenue expectations while continuing to invest in growth, talent, and our portfolio of innovative solutions to speed our pivot to digital."

Yet at least for now, Cognizant will likely have to deal with a sustained slowdown. In its guidance for the second quarter, the IT consulting company projected sales growth of just 3.9% to 4.9% even after adjusting for currency impacts, with the implication that reported dollar-based numbers could be even weaker.

Moreover, McLoughlin noted that Cognizant now expects slower growth in financial services and healthcare for the remainder of the year. That prompted Cognizant to cut its guidance for the full year, with a new range of 3.6% to 5.1% in currency-neutral sales growth comparing unfavorably with past projections for top-line gains of 7% to 9%. Adjusted earnings are now expected to be between $3.87 and $3.95 per share, down from the $4.40 per share the company expected three months ago.

Cognizant shareholders didn't like the downgrade, and the stock was down 8% in premarket trading Friday following the late-Thursday announcement. Even though the company has the financial resources and wherewithal to recover from tough conditions, Cognizant will still have to deal more successfully with strong competition in the lucrative IT space for the foreseeable future.

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