Can Cognizant Technology Keep Up Its Growth?

Cognizant Technology Solutions (NASDAQ: CTSH) has been a key player in the technology revolution over the past 25 years. By providing much-needed information technology consulting services, Cognizant has been able to succeed in helping clients join the digital age effectively and competitively. Even with some of its rivals having competitive advantages in the form of lower labor costs, Cognizant nevertheless has found ways to keep expanding and growing its footprint.

Coming into Monday's first-quarter financial report, Cognizant investors were expecting the company to keep on producing the impressive gains that they've seen in recent quarters. The IT consultant's numbers were solid, but some investors weren't entirely pleased with the pace of growth that its guidance implied. Despite past successes, now's a crucial time for Cognizant to keep moving forward and sustain its momentum.

How Cognizant fared to start 2018

Cognizant's first-quarter results were reasonably good. Revenue picked up 10% to $3.91 billion, just barely inching over the consensus forecast among those following the stock. GAAP net income eased slightly lower from year-ago levels, but after making allowances for certain extraordinary items, adjusted earnings of $1.06 per share climbed by more than 20% compared to the first quarter of 2017. The figure exactly matched what most investors were looking to see.

Cognizant continued to make itself a more balanced operation. The relatively small communications, media, and technology group saw the strongest year-over-year revenue growth, weighing in at 18%. Two of Cognizant's larger segments, healthcare and the products and resources unit, posted double-digit percentage gains of 12% and 11% respectively. Only the financial services division lagged, and even there, gains of 6% were slightly faster than the unit posted in the fourth quarter of 2017.

North America still dominates Cognizant's geographical footprint, but growth there has been less impressive than what the IT company has seen abroad. Gains in Cognizant's home market came in at almost 8%, but European sales were up 22%, due in large part to a nice rise in the value of the euro against the U.S. dollar. Revenue from the rest-of-world category rose at a 12% clip.

CEO Francisco D'Souza explained the moves behind the company's recent performance, saying, "Cognizant has built the capabilities and scale to help clients digitize their offerings, create personalized customer experiences, instrument their operations, and modernize their IT infrastructure."

D'Souza pointed to ongoing progress in Cognizant's shift to digital services and solutions in driving the company forward.

What's next for Cognizant?

Cognizant is still optimistic about the likely consequences of the strategic moves it's made. As D'Souza put it, "This digital-at-scale value proposition is winning with clients and positioning us well to deliver a strong 2018."

Yet one source of disappointment came from tax reform. As CFO Karen McLoughlin explained, Cognizant's guidance for 2018 had to be adjusted to "reflect a higher than originally anticipated effective income-tax rate due to the updated interpretation of the U.S. Tax Cuts and Jobs Act of 2017."

As a result, Cognizant now expects adjusted earnings of at least $4.47 per share, down $0.06 from its guidance three months ago. The company did boost the lower end of its full-year revenue expectations by $50 million, setting a new range of $16.05 billion to $16.3 billion. For the second quarter, Cognizant sees sales of $4 billion to $4.04 billion, and adjusted earnings should come in at or above $1.09 per share. The second-quarter numbers weren't as favorable as some had hoped, and the drop in bottom-line projections for the full year came as a disappointment.

Cognizant shareholders didn't celebrate the results, and the stock was down 4% in pre-market trading following the announcement. With plenty of competition in the IT consulting space, Cognizant can't afford to let up in its efforts to grab as much market share as possible with its digital initiatives if it wants to keep up its solid growth from recent years.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cognizant Technology Solutions. The Motley Fool has a disclosure policy.