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Cognizant Technology Builds Momentum but Eases Back Sales Guidance

By Dan Caplinger - May 6, 2016 at 10:51AM

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The IT consulting company's earnings were better than expected.

Image source: Cognizant.

Technology is an integral part of how the business world works, and Cognizant Technology Solutions (CTSH 0.80%) aims to give its customers the tools they need to take advantage of IT resources effectively. Yet competition has become fierce in the tech world, and Cognizant has had to find ways to fight back against rivals. Coming into Friday's first-quarter financial report, Cognizant investors were expecting the consultant to produce double-digit percentage gains in earnings and revenue, and the company succeeded in doing so. Yet some questions about the pace of future revenue growth could play a role in the company's longer-term success. Let's look more closely at how Cognizant did in its most recent quarter and whether it can avoid a pullback later in the year.

Cognizant keeps on growing
Cognizant's first-quarter results were mixed in the eyes of investors following the stock. Revenue was up 10% to $3.20 billion, which was slightly less than the 11% growth rate that most had expected to see. Net income rose a healthier 15% to $441.2 million, and after making some modifications to reflect extraordinary items, adjusted earnings of $0.80 per share were a penny above the consensus forecast among investors.

Taking a closer look at Cognizant's various segments, some of the trends that we've seen in past quarters took a different direction in the first quarter. Healthcare was the laggard in terms of revenue growth, climbing just 4%. Gains in sales from the financial services segment also slowed, although it maintained a healthier 11% pace. Solid 15% results from the manufacturing, retail, and logistics segment as well as the company's catch-all Other category helped support Cognizant's overall top-line growth.

Geographically, Cognizant enjoyed a relatively balanced mix of business. The European business had slightly higher growth than the U.S., with relative weakness in the U.K. getting offset by solid gains in the rest of the continent. The Rest of World region saw revenue jump by almost a quarter.

Cognizant CEO Francisco D'Souza was generally content with the quarter. "Client demand for our digital expertise, services, and technologies remains strong," D'Souza said, and "we continue to see positive returns from our extensive strategic investment in disruptive technologies, new digital business models, and best-in-class delivery capabilities." Yet the company also acknowledged that merger and acquisition activity in the healthcare business and weak markets in the financial industry weighed on Cognizant's short-term results.

What's ahead for Cognizant?
The bigger concern is whether Cognizant can sustain its growth going forward. On one hand, the company believes that it is doing a good job both in getting new clients and in expanding relationships with existing ones. That justified the IT specialist's decision to boost its labor force by more than 11,000 during the first quarter through an accelerated hiring initiative.

Yet as we saw last quarter, news on the guidance front wasn't as encouraging. The company narrowed its expectations for revenue for the full fiscal year toward the lower end of its previous range, cutting the top end by $200 million and posting a new range of sales guidance for $13.65 billion to $14 billion. Full-year adjusted earnings guidance for $3.32 to $3.44 per share was unchanged.

Second-quarter figures were also a bit lighter than investors wanted to see. Revenue should come in between $3.34 billion and $3.4 billion, and adjusted earnings of $0.80 to $0.82 per share would represent minimal growth from year-earlier figures. Both sets of numbers are below the consensus forecast among investors as well.

Nevertheless, Cognizant shares moved ahead on the news, with the stock climbing 2.5% in the first hour of the trading session following the announcement. Despite challenges, investors appear confident that Cognizant can overcome the obstacles in its path and produce solid results in the future.

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