The past decade has been a goldmine for Cognizant Technology Solutions (CTSH 0.75%), as enterprise customers have had to turn to information technology consultants to find solutions to keep up with their peers. In a world in which cloud computing, data analytics, and other cutting-edge capabilities have become commonplace, Cognizant provides much-needed expertise to ensure that companies big and small make the right moves for their IT needs.
Coming into Wednesday's second-quarter financial report, Cognizant investors had high hopes for seeing modest revenue growth, but they were ready once again to see some downward moves in earnings. Cognizant's results were mixed, but they had enough high points to give shareholders some confidence that the company is making progress toward its long-term strategic goals.
Cognizant turns up the volume
Cognizant's second-quarter results had good and bad points. Revenue growth of 3.4% was slower than in the previous quarter, as sales came in at $4.14 billion. That number matched what most people were expecting to see on the top line. Net income of $509 million was higher by 12% from year-earlier levels, but after accounting for some extraordinary items, adjusted earnings of $0.94 per share were down more than 10% over the same period. Even so, the figure was $0.02 per share better than the consensus forecast among investors.
Geographically, Cognizant got more of its sales growth internationally. North American revenue rose just 2.3%, making up about three-quarters of the company's total. In Europe, revenue grew 8.6%, as double-digit percentage sales gains in the Continental Europe region were able to overcome slower growth of just 4.2% in the U.K. market. Cognizant's rest of world segment saw gains of just 1.6%, but it made up only around 6% of total revenue.
As we've seen a lot recently, Cognizant's biggest business segments were also its weakest in terms of sales growth. Financial services revenue grew only 0.3%, and healthcare sales actually fell 1.9% from year-ago levels. By contrast, both the products and resources segment and the communications, media & technology division posted double-digit percentage sales gains.
Cognizant's explanations for its results shed some light on the numbers. In financial services, a partnership with three financial institutions in Finland helped offset weaker performance from large banking and insurance clients. Healthcare industry consolidation hurt the IT consultant's results in that segment, but large enterprise deals in the life sciences arena offset some of the declines elsewhere. Demand for cloud and digital engineering services drove results at the other two segments.
CEO Brian Humphries was succinct in his comments. "We are taking the necessary steps to position Cognizant for improved commercial and financial performance," the CEO said in defending the company's short-term performance.
What's next for Cognizant?
Cognizant has a plan for moving forward. As Humphries described it: "While there is lots of work ahead, I am encouraged by what I have seen to date and am optimistic on our future." CFO Karen McLoughlin gave more color on the operational side, saying that Cognizant is "implementing actions in the second half of the year that we expect will lower our existing cost structure and allow for greater investment in growth, talent, and digital solutions."
Cognizant made some minor adjustments to its full-year guidance. On the sales front, the IT consultant now sees revenue climbing 3.9% to 4.9%, representing roughly equal narrowing of its previous range of 3.6% to 5.1% growth. Adjusted earnings should come in between $3.92 and $3.98 per share, which is an increase of about $0.03 to $0.05 from its earlier projection. Third-quarter revenue gains should be consistent with the full-year numbers, expected to come in up 3.8% to 4.8%.
Cognizant shareholders were reasonably pleased about the results, and the stock picked up almost 4% in after-hours trading following the announcement. Even if Cognizant's banking customers continue to pull back from their previous levels of activity, the IT consultant has done a good job of tapping other opportunities across multiple industry groups to sustain its growth and profitability.