UPDATE 3-Cognizant Q3 beats, but growth lags main rivals

Mon Nov 1, 2010 2:27pm EDT

* Q3 adj EPS $0.69 vs est $0.60

* Q3 rev up 10 pct sequentially

* Ups FY EPS to at least $2.50

* Shares down 3 percent

* Sees shift in geographical, industry business mix (Adds CFO, analyst comment; conference call; Graphic; updates share movement)

By S. John Tilak

BANGALORE, Nov 1 (Reuters) - Cognizant Technology Solutions Corp (CTSH.O) trailed its main rivals even as it posted a second straight quarter of double-digit sequential revenue growth, knocking its shares down 3 percent.

But Chief Financial Officer Gordon Coburn predicted Cognizant, whose clients include 3M (MMM.N) and Harris Corp (HRS.N), would outpace the market -- main rivals include Infosys Technologies (INFY.BO) and Tata Consultancy Services (TCS.BO) -- this year.

"We are taking market share," he told Reuters. "If you look at our full-year growth expectations, it's clearly substantially higher than anyone else in the industry." The IT services provider, which has beaten profit estimates for seven straight quarters, raised its 2010 outlook for a third time on strong demand from clients and technology spending on financial services.

It now expects full-year revenue growth of at least 39 percent.

Infosys is expected to grow 24-25 percent in dollar terms for the year to end-March, while TCS, the largest Indian IT services player, gives no outlook.

Cognizant shares, which hit a life high of $68.87 last week ahead of the third-quarter numbers, edged higher on the results, but later traded down 3 percent at a near 6-week low in more than double normal volumes.

"Investors were disappointed as they were expecting a blockbuster quarter," Signal Hill analyst Mayank Tandon said.

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Cognizant earnings Graphic: r.reuters.com/mud33q

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The company's 10.1 percent sequential revenue growth beat market estimates, but just trailed Infosys' 10.2 percent and was well short of TCS's 12 percent.

The market had become used to New Jersey-based Cognizant -- the majority of whose employees and development centers are based in India -- growing faster than, and taking market share from, its India-based rivals.

"Cognizant and the industry at large are now transitioning into a period where the (post-recession) pent-up boost will be less pronounced," said Sanford C. Bernstein analyst Rod Bourgeois.

While Cognizant's strong third quarter indicated a rebound in technology spending on financial services -- its biggest market, contributing about 43 percent of revenue -- was holding firm, Coburn sees diversification in both geography, towards Asia and Europe, and industries.

"I would expect a shift more towards international operations," he said. About 78 percent of third-quarter revenue came from North America.

And he said revenue from retail and manufacturing and information and media would grow faster than the company average, making it less reliant on financial services sector.

STRONG FULL YEAR

Cognizant expects 2010 earnings of at least $2.50 per share, excluding items. It had earlier forecast earnings of $2.42 per share, excluding items, on revenue growth of at least 36 percent.

Third-quarter net income rose to $203.7 million, or 66 cents a share, from $136.6 million, or 45 cents a share, a year ago. Excluding items, earnings were 69 cents a share.

Revenue was $1.22 billion, up 10 percent sequentially and up 43 percent year-over-year.

Analysts had expected earnings of 60 cents a share, excluding exceptionals, on revenue of $1.18 billion, according to Thomson Reuters I/B/E/S.

The stock, valued at $19.6 billion, has gained 22 percent since record second-quarter results in August, outperforming a 5 percent rise in the broader S&P 500 index .SPX. (Reporting by S. John Tilak; Editing by Roshni Menon)