Cognizant Technology Sees Profit Growth Ahead

By Markets Fool.com

Many corporate customers turn to Cognizant Technology Solutions (NASDAQ: CTSH) to help them make better use of the information technology resources that have become available in recent years. Although economic conditions in many areas of the world have been sluggish at best, Cognizant has nevertheless sought to overcome some of the headwinds that its competitors have cited in seeing their growth slow. Coming into Monday's third-quarter financial report, Cognizant investors wanted to see continued growth in the IT consultant's top and bottom lines, and the company generally delivered on that score. Moreover, Cognizant said that it continues to see client demand for its services, suggesting that it believes it can overcome any potential slowdown. Let's take a closer look at Cognizant's latest results and what they say about the state of the IT consulting industry.

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Image source: Cognizant Technology.

Cognizant's growth stays steady

Cognizant's third-quarter results generally stayed the course in the company's ongoing growth trends. Revenue climbed 8.4% to $3.45 billion, which was almost exactly what most investors following the stock had expected to see. Generally accepted accounting principles (GAAP) net income climbed 12% to $444.4 million, and after making allowances for extraordinary items, adjusted earnings of $0.86 per share were $0.02 higher than the consensus forecast among investors.

If we look more closely at the numbers, Cognizant's business segment results revealed some trends going on within the company. Among the three most important segments, the manufacturing, retail, and logistics business performed the best, posting 12% year-over-year growth in revenue compared to the year-ago quarter. Healthcare once again trailed, with gains of just 5.7% compared to a year ago, but its sequential revenue growth was the highest among Cognizant's businesses. The key financial services division remained the largest by revenue, but its 7% gain in sales compared to the third quarter of 2015 slowed considerably from where it was in recent quarters. The segment into which Cognizant reports its other revenue actually had the best year-over-year performance, picking up nearly 14%.

In terms of geography, the impact of the U.K. Brexit decision was the most obvious factor. Sales in the U.K. fell 2.3%, even as the rest of Europe saw sales soar by 17%. North America's 7.9% growth was squarely in the middle, and beyond North America and Europe, revenue from the rest of the world soared by nearly a quarter compared to year-ago levels.

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Cognizant CEO Francisco D'Souza pointed to what he saw as good conditions for the company. "We see ongoing client demand for our services across industries and geographies," D'Souza said, and "as the physical and digital worlds converge, we have made it easier for clients to work with us by aligning our organizational structure and capabilities around the broader focus of assisting clients drive digital transformations."

Can Cognizant keep climbing?

Going forward, Cognizant sees reason for optimism. The CEO pointed to the company's newly named president, Raj Mehta, and his ability to lead his executive team toward implementing strategic initiatives. Moreover, the company keeps adding new staff to meet anticipated demand, with net additions to the headcount coming in at about 11,500.

Cognizant's guidance for the immediate future was mixed in most investors' eyes. On the top line, anticipated fourth-quarter revenue of $3.45 billion to $3.51 billion would be slightly less than the $3.52 billion consensus forecast among those following the stock. However, adjusted earnings of $0.85 to $0.88 per share would fall within the anticipated range among investors.

For the full year, Cognizant now believes that it will bring in between $13.47 billion and $13.53 billion in sales, which basically narrows its previous guidance to the bottom of its earlier range. However, adjusted earnings of $3.38 to $3.41 per share represented a narrowing above the midpoint of its previous range, showing the disparity between earnings and revenue performance.

Cognizant investors seemed to like the news, sending the stock up nearly 4% in pre-market trading following the announcement. With the company overcoming difficult industry conditions, Cognizant seems to be taking the right steps to foster long-term growth for its business.

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Dan Caplinger 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.