Cognizant results beat, but healthcare underperforms

Thu Nov 8, 2012 12:52am IST

Engineers attend to calls from abroad inside a call center in Gurgaon on the outskirts of New Delhi December 3, 2003. REUTERS/Kamal Kishore/Files

Engineers attend to calls from abroad inside a call center in Gurgaon on the outskirts of New Delhi December 3, 2003.

Credit: Reuters/Kamal Kishore/Files

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REUTERS - Strong demand from the financial services industry and from companies in Europe boosted Cognizant Technology Solutions Corp's third-quarter results and prompted the IT services company to raise its full-year earnings forecast.

Cognizant, however, said its healthcare division, which accounts for about 25 percent of total revenue, underperformed its expectations in the quarter.

Revenue from the healthcare division was slightly lower than in the second quarter, and Cognizant said it expects growth to remain flat in the current quarter.

Healthcare has been the growth driver for Cognizant for at least the last three to four years, Morningstar Inc analyst Swami Shanmugasundaram told Reuters.

"Now they have to find a different segment to offset that, because if you look at it, for the first time in many years, I think, healthcare sequential revenue declined," he said.

The company also said that it expects business from the pharma industry to remain soft in 2013.

Shares of the Teaneck, New Jersey-based company, most of whose employees are in India, were down 2 percent at $66.16 on Wednesday on the Nasdaq.

The U.S.-listed stocks of India-based rivals Wipro Ltd and Infosys Ltd were also down more than 1 percent. The broader market was down 2 percent.

RISING OUTSOURCING SPENDING

Cognizant said clients, mainly those from North America, have indicated that overall IT spending would remain flat in 2013, but spending on outsourcing would rise.

"We think there are healthy growth opportunities in Europe going forward, and the economic downturn has served as a catalyst for longer-term growth of our business in Europe," Cognizant President Gordon Coburn told Reuters.

Cognizant's revenue from Europe grew 4.1 percent in the quarter. Rival Accenture Plc (ACN.N) earlier reported a 4 percent fall in quarterly revenue from Europe, the Middle East and Africa.

IT services providers such as Cognizant, Accenture, and India-based Tata Consultancy Services Ltd (TCS.NS) and Wipro have benefited from a rise in demand for outsourcing as companies try to cut costs.

However, Accenture said in September that spending on consulting would remain slow.

"If I compare (Cognizant's) growth with all the other players in the market, whether it's TCS or Infosys or Wipro, Cognizant has been outpacing everybody, sure they still have that edge," analyst Shanmugasundaram said.

Cognizant has traditionally worked with relatively lower margins, helping the company win more contracts, while other IT services companies are coping with slowing business spending in the United States and Europe.

The company, which was founded in 1994 as a captive unit of Dun & Brad Street (DNB.N) in India, has not missed analysts' profit estimates for 15 quarters.

STRONG DEMAND FROM BANKS

Third-quarter net profit rose 22 percent to $276.9 million, or 91 cents per share. Revenue rose 18 percent to $1.89 billion.

Analysts expected earnings of 87 cents per share on revenue of $1.88 billion.

Revenue from financial services, Cognizant's largest business, increased 20 percent in the quarter.

Cognizant gets about 40 percent of its revenue from financial services clients such as JPMorgan Chase & Co (JPM.N), Rabobank RABOC.UL and UBS AG (UBSN.VX).

"I do have a greater degree of optimism with financial services than I had say three or four quarters ago," Chief Executive Francisco D'Souza said on a conference call.

Outsourcing by financial services companies is growing as banks and insurers try to cut costs to offset low interest rates and weak demand for loans.

Cognizant said it now expects full-year earnings of at least $3.42 per share, up from its previous forecast of at least $3.38 per share. It reaffirmed its revenue forecast of $7.34 billion.

Analysts on average expect earnings of $3.39 per share on revenue of $7.34 billion, according to Thomson Reuters I/B/E/S.

(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Roshni Menon)

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