The third quarter earnings season was another “SMAC down” for Cognizant Technology CTSH +0.49% Solutions. The stock’s up 1.52% in the first two hours of trade as it beat its own earnings guidance on Tuesday with another record-breaker.
This time, it was the healthcare industry’s ramp-up for the Affordable Care Act that helped propel them to $2.31 billion in revenues.
Cognizant CEO Francisco D’Souza told FORBES today that the entire IT industry has benefited from two major economic transitions. First, the 2008 financial crisis forced companies to cut back on staff. In order to stay relevant as a company and keep growing while reducing staff and investments, they turned to outsourcing partners. Second, and perhaps more importantly, is the advent of new technologies being adopted by major firms. Social, mobile, analytics and cloud computing, or SMAC in Cognizant lingo, are keeping IT outsourcers alive and kicking.
“We’re at a very interesting transitional phase in the technology market,” D’Souza said. “Once in a decade or so you get a new generation of technology that comes a long that has a dramatic impact on a clients ability to differentiate, drive productivity and compete. The last time we saw that happening was in the 1990s when the internet went commercial. Today you have mobile and the cloud. All this new technology is having a profound impact on companies. We are seeing that impact across virtually all industries served by IT outsourcing firms like ours, whether it’s book retailing or healthcare. It’s changing the way our clients do business.”
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Not only is the business climate changing for the IT service client, but it is changing for the companies that deliver those services. For most, it’s changing for the better. Reductions in IT spending haven’t really been felt by the majors.
Take Indian IT behemoth Tata Consultancy Services . Last month it reported second quarter revenue of $3.3 billion compared with $3.1 billion in the first quarter and $2.8 billion in the second quarter of 2012. Net income rose to $748 million from $668 million in the first and $643 million in the second quarter of 2012.
“We continue to see robust demand across markets…as clients re-imagine their future,” said Tata CEO Natarajan Chandrasekaran.
That future is all SMAC.
“Companies are facing these dual mandates today,” said D’Souza. “On one hand they tell us that they have to be more efficient and effective. They’re driving down costs. On the other hand they have all these investments they need to make in new technology, and then there are new regulations to tend with for banking clients that need business process outsourcing support. The one thing that is clear across segments is that companies are investing in new technologies to drive top line growth. A lot of that investment is going to companies like us who have to be prepared with the latest technology to deliver to them.”
At this point, Cognizant is making it look easy.
Their quarterly revenue rose to $2.31 billion, up 6.7% sequentially and 21.9% from the year-ago quarter. Net income was $319.6 million, up 6.4% sequentially and 15.4% from the year-ago quarter. The company is expanding. It added 2,100 people to payroll last quarter and has a global headcount of approximately 166,400 employees as of September 30, 2013. This quarter’s surprising outcome led Cognizant to increased its full-year financial guidance.
Fiscal 2013 revenue is now expected to be at least $8.84 billion, up 20.3% compared to 2012.
In the equity markets, all of the Indian-owned or managed IT service firms are up double digits year-to-date while IBM IBM -0.37% is down nearly 7%. Over the last year, Cognizant shares are up 34.03%, better than rivals Infosys and Wipro WIT -0.96%. Only Tata Consultancy Services is better, up 53.4%. IBM is down 8.17% in the last 12 months.
D’Souza said his company intends to continue growing both organically and vertically. Last month, the 20-year old Cognizant acquired French financial services consulting company Equinox to enhance its consulting services, followed by the acquisition of a unit of ValueSource.
“We will acquire companies in geographic areas where we don’t yet have a footprint, as was the case with Equinox,” D’Souza told FORBES. “But we don’t really acquire for growth in the traditional sense. We are looking for capabilities. So if a company is in a segment we’re not in, or has a product line we don’t have or want to expand upon, we will consider. There are lots of areas we want to acquire, but primarily they are focused on new geographies and the new technologies,” he said about social networking, mobile technology, computer analytics and the cloud, aka SMAC.
“The sheer velocity of change in the industries we serve is driving the C-suite to challenge the status quo and rethink their business models to be relevant for the future,” D’Souza said.
Date: November 11, 2013