Cognizant Technology Solutions Remains Focused on the Long Term

By Markets Fool.com

Continue Reading Below

Image source: Cognizant Technology Solutions.

Cognizant Technology Solutions Corp. (NASDAQ: CTSH) released slightly better-than-expected second-quarter 2016 results on Friday and expanded its share repurchase program in the process. But despite bucking a worrisome trend of weaker results from its peers in Q2, shares of the IT consulting and business process services company are little changed since then. So let's take a look at how Cognizant capped the first half of the year and what to expect going forward.

Cognizant Technology's headline numbers

Quarterly revenue climbed 9.2% year over year to $3.37 billion, and based on generally accepted accounting principles (GAAP), that translated to a 39.9% decline in net income to $252.4 million, or $0.41 per diluted share. On an adjusted (non-GAAP) basis, however -- which adds perspective by excluding items like stock-based compensation and acquisition-related charges -- Cognizant's net income per share increased 10.1% year over year to $0.87.

By comparison, Cognizant's guidance in May called for roughly the same revenue in the range of $3.34 billion to $3.4 billion and lower adjusted earnings per share of $0.80 to $0.82.

Continue Reading Below

Cognizant president Gordon Coburn stated:

The shift to digital continues to intensify and accelerate.Our strong second quarter revenue growth, adding incremental quarterly revenue of nearly$170 million, is the result of clients turning to Cognizant to help them define strategy and infuse new technologies to address key challenges and implement new business models. Our robust strategy and implementation capabilities have made us a key partner to clients as they fundamentally transform their businesses and navigate the shift to the digital economy.

Cognizant CEO Francisco D'Souza elaborated that the results "represented broad-based revenue growth across service lines, geographies and industries, including healthcare and financial services."

Cognizant's segment results, strategic initiatives

Let's get a little more specific and break down revenue by segment. The quarterly results show that financial services sales climbed 8.1% year over year to $1.351 billion, healthcare grew 6.9% to $958.8 million, manufacturing/retail/logistics segment sales grew 14.2% to $660.4 million, and all other categories increased 11.2% year over year to $399.5 million.

On a geographic basis, North American revenue increased 8.3% to $2.624 billion, United Kingdom revenue grew 4.4% to $310.7 million, Rest of Europe sales increased 15.5% to $236.5 million, and Rest of World revenue rose 25% to $198.6 million.

During the subsequent conference call, D'Souza elaborated that after Cognizant's slow start in the first quarter, the financial services and healthcare segments returned to positive sequential growth in the second quarter as expected, helping to drive one of the company's strongest ever performances in terms of sequential dollar growth.

D'Souza also offered some color on Cognizant's progress driving its three strategic initiatives, which aim to foster the aforementioned digital transformation.

As a reminder, first among those initiatives is helping clients build new front-end capabilities, both through investing organically and through select acquisitions. Regarding the latter, just last week Cognizant announced its acquisition of Idea Couture, a privately held "digital innovation, strategy, and design firm" that specializes in designing and prototyping products, services, and business models to support growth and build competitive advantage. Idea Couture will become part of Cognizant Digital Works.

Second, Cognizant is working to drive efficiency in the core transaction processing operations of its clients, building platform-based solutions and industry utilities that are offered to customers in a Business Process as a Service (BPaaS) model. Following Cognizant's $2.7 billion deal to acquire healthcare information specialist TriZetto in 2014, for example, the company has secured several such deals with a combined total contract value approaching $2 billion -- which helps explain its relative strength in the healthcare sector -- and is chasing additional similar opportunities in the pipeline.

And third, Cognizant is working to bring clients' existing systems up to date with next-gen IT, including standardizing infrastructure and simplifying how applications are developed and delivered.

"We're making good progress in each of these areas," D'Souza stated, "and we're confident that this framework will differentiate our services and solutions in the marketplace now and in the future."

Also during the quarter, Cognizant executed a one-time remittance of $2.8 billion from India, increasing its cash balance in the U.S. by $1 billion, net of taxes, and in other international markets by $1.6 billion.

"This provides additional financial flexibility in funding our strategic investments to drive long-term growth for Cognizant," explained CFO Karen McLoughlin.

A cautious look ahead

As in Cognizant's last two quarterly reports, however, management again warned that discretionary spending in the banking sector remains soft. And macroeconomic headwinds, including uncertainty and currency pressure stemming from the recent "Brexit" vote -- as well as persistently low interest rates -- could potentially crimp growth in the financial services and healthcare sectors in the second half of the year.

As such, Cognizant anticipates third-quarterrevenuein the range of $3.43 billion to $3.47 billion and adjusted earnings per share in the range of $0.82 to $0.85.For the full fiscal year 2016, Cognizant now expects revenue in the range of $13.47 billion to $13.6 billion and adjusted earnings per share of $3.32 to $3.44.

By comparison, Cognizant's previous 2016 guidance called for the same EPS range, but on higher revenue of $13.65 billion to $14 billion.

To their credit, management continues to insist that despite the near-term headwinds, Cognizant's pipeline remains healthy, and the company's compelling medium- to long-term story remains intact.And they're putting their money where their mouth is: With $1.9 billion of its existing $2 billion stock repurchase program now exhausted, Cognizant's board approved a $1 billion increase in the authorization, to $3 billion, and extended the program's term by one year to Dec. 31, 2018.

In the end, though the market may frown upon Cognizant's conservative outlook and potential short-term struggles, I think patient, long-term investors should be content with where it stands today.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cognizant Technology Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.