August 3, 2010 / 10:31 AM / 7 years ago

UPDATE 5-Cognizant outshines rivals with strong results

* Q2 EPS $0.56 vs est $0.52

* Q2 revenue up 15 sequentially

* Seeing strength across all segments, regions

* Sees 2010 sales up at least 36 pct from last year

* Shares soar 15 pct to all-time high (Adds CFO interview comments; updates stock movement)

By S. John Tilak

BANGALORE, Aug 3 (Reuters) - Cognizant Technology Solutions Corp (CTSH.O) reported a profit that topped market estimates for the sixth straight quarter, helped by a surge in discretionary projects, and raised its 2010 revenue outlook well above what Wall Street was looking for.

The Teaneck, New Jersey-based IT services provider outperformed its larger India-based rivals, pushing its shares up 15 percent to an all-time high. Most of its employees and development centers are based in India.

The company saw robust spending from clients across all its business segments and geographies.

“This report from Cognizant is resounding evidence that the offshore services market is thriving and that Cognizant’s share-gaining prowess is remaining in full gear,” Sanford C. Bernstein analyst Rod Bourgeois said.

Tata Consultancy Services (TCS.BO), Infosys Technologies (INFY.BO) and Wipro (WIPR.BO) posted low- to mid-single-digit sequential revenue growth in the June quarter, the analyst noted.

Cognizant’s second-quarter revenue was $1.11 billion, up 42 percent from the previous year and 15 percent sequentially. It was the first time the company recorded over $1 billion in quarterly revenue. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic comparing Cognizant's growth with the S&P 500:

Graphic comparing annual growth of Cognizant and Infosys: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“The rising tide is clearly lifting all boats. But Cognizant’s growth rate is particularly spectacular,” Kaufman Bros analyst Karl Keirstead said.

“It’s pretty clear that the Indian outsourcing sector is on fire.”

“Our secret sauce was the investments that we made through the downturn,” Chief Financial Officer Gordon Coburn said in an interview with Reuters.

During the recession, the company invested in areas such as consulting, emerging markets and cloud computing.

Application development revenue, an indicator of discretionary projects, grew 52 percent year over year.

Cognizant attributed part of the rise in discretionary spending to pent-up demand from projects deferred last year.

“As this pent-up demand has released, we’ve been able to capture an outsized share of it,” Chief Executive Francisco D‘Souza said on a conference call with analysts.

Coburn said that the 15 percent sequential revenue growth was not sustainable. “I would not want to have anyone have the expectation that we could have this type of overperformance that we did in the second quarter.”

“That was a bit of an anomaly. But it gave us a strong foundation to grow for the future,” he added.


Second-quarter adjusted operating margins came in at 19.9 percent, within its target operating margins of 19 percent to 20 percent, Coburn said on the call.

The company expects to maintain its margins within that range in the second half of the year, Coburn said.

The results show that the company’s financial services customers, the worst hit during the recession, are starting to spend again.

Revenue from financial services, the company’s biggest segment, rose 41.6 percent year over year, accounting for 42.6 percent of its business in the quarter. [ID:nSGE6710K3]

For 2010, the company forecast earnings of at least $2.42 a share, excluding items, on revenue of at least $4.46 billion, or up at least 36 percent from a year ago.

The revenue outlook, a key metric the Wall Street looks for in Cognizant, is up from the company’s earlier forecast of at least 25 percent.

“The results, quite frankly, exceeded the most optimistic of Street expectations,” said Keirstead. The outlook could still prove conservative, he said.

Second-quarter net income rose to $172.2 million, or 56 cents a share, from $141.3 million, or 47 cents a share, a year earlier.

Analysts expected earnings of 52 cents a share, on revenue of $1.02 billion, according to Thomson Reuters I/B/E/S.

Cognizant’s shares were up 10 percent, or $5.28, at $60.70 in Tuesday morning trade on Nasdaq. They touched $63.94, their highest since going public in 1998, earlier in the session.

They have gained 81 percent in the last 52 weeks, outperforming a 12 percent rise in the broader S&P 500 .SPX Index.

The company, which also competes with U.S. firms like Accenture (ACN.N), Hewlett-Packard (HPQ.N) and IBM (IBM.N), had a market capitalization of more than $16 billion ahead of Tuesday’s gains. (Reporting by S. John Tilak; Editing by Vinu Pilakkott and Maju Samuel)

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