Cognizant Technology Keeps Pushing Profits Higher

By Dan

Some companies post dramatic growth and wow investors with the pace of their gains. Yet much of the time, the most solid companies have less exciting but steady and dependable growth. That's been the case lately with Cognizant Technology Solutions (NASDAQ: CTSH), which is at the forefront of the shift toward digital IT services and has fought hard to maintain its competitive position in an increasingly cutthroat industry.

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Coming into Friday's first-quarter financial report, Cognizant investors were looking for the company to keep improving its results bit by bit, and the company largely delivered on those expectations. Let's take a closer look at Cognizant and what its latest results say about its future.

Image source: Cognizant.

Cognizant maintains its momentum

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Cognizant's first-quarter results were consistent with its past performance. Revenue climbed 10.7% to $3.55 billion, which was slightly better than most of those following the stock had expected and was a higher pace from the fourth quarter of 2016. Adjusted net income came in at $669 million, up 5% from a year ago, and that produced adjusted earnings of $0.84 per share. That figure was $0.01 higher than the consensus forecast among investors.

Looking more closely at the report, Cognizant once again saw its best performance from its smallest business divisions. The communications, media, and technology segment enjoyed the fastest growth rate, seeing sales climb by nearly 17% compared to year-ago levels. The products and resources group almost matched that growth rate with 16% gain. Yet combined, the two segments make up just a third of Cognizant's overall revenue.

Growth rates for the rest of Cognizant's businesses were slower, but still strong. Healthcare enjoyed sales gains of nearly 10%, while the largest group, financial services, brought up the rear with a 7% growth rate. Healthcare saw sequential declines compared to the fourth quarter of 2016, but Cognizant's other units managed to keep their upward momentum.

From a geographical standpoint, Brexit once again made the U.K. Cognizant's weakest region, with sales falling 8%. But the rest of Europe made up for the U.K.'s shortfall, salvaging a nearly 7% revenue increase for the region as a whole. North America saw 11% gains in year-over-year revenue, while the rest-of-world region again saw the fastest growth, climbing by more than a quarter.

What's ahead for Cognizant?

CEO Francisco D'Souza took the quarterly results as a milestone toward more important long-term goals. "We delivered solid results in the first quarter," D'Souza said, "and continued to build our digital solutions portfolio, expand our skills, and enhance our engagements with clients." The CEO is optimistic about the company's ability to move forward.

In particular, time is increasingly of the essence for the IT services provider to keep up with competitors. In D'Souza's words:

Cognizant's guidance reflected some of that enthusiasm. For the second quarter, revenue should come in between $3.63 billion and $3.68 billion, with adjusted earnings of at least $0.89 per share. Cognizant kept its full-year guidance largely unchanged, with revenue still expected between $14.56 billion and $14.84 billion. The company boosted its adjusted earnings target by $0.01 and now believes it will earn at least $3.64 per share. The IT provider's estimates have generally been solid in the past, and they're consistent with what investors have expected from Cognizant.

Cognizant investors seemed reasonably happy with the report, and the stock climbed a bit more than 1% in pre-market trading following the announcement. Despite the importance of keeping pace in a fast-moving industry, Cognizant's steady growth is reassuring to many tech investors seeking more dependable long-term business models in which to invest.

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