Cognizant results, outlook set to blow past Street

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Cognizant Technology Solutions Corporation's fourth-quarter results are expected to top consensus estimates on strength at its financial services segment and an improvement in discretionary technology spending.

However, investors will watch the IT services provider's outlook closely to see if it beats expectations by a big margin. The company's first-quarter and 2010 forecasts are expected to be conservative yet ahead of Wall Street view.

At the heart of Cognizant's performance lies financial services, its biggest segment, which accounted for 43% of third-quarter revenue. "I will be looking to see if Cognizant's financial services vertical is driving disproportionate growth, which is quite possible," Sanford C Bernstein analyst Rod Bourgeois said, noting the rebound in financial services.

The company's sharp exposure to financial services and North America saw its stock plummet to USD 14.38 during the peak of the global economic crisis in November 2008 from a high of USD 37.10 in June 2008.

But in the third quarter of 2009, the segment grew 7.4%. Impressive growth in healthcare, which was up 30% in the period, is also expected to continue.

Bourgeois expects Cognizant's management to confirm that its clients' budgets are being finalized in a timely way at the outset of 2010.

With the economy getting better, customers are loosening their grip on tight budgets, making way for a rebound in information technology spending, and Cognizant is expected to benefit.

Last month, market researcher Gartner said worldwide IT spending would rise 4.6% to USD 3.4 trillion in 2010. IT services spending is expected to rise 5.6%, compared with a decline of 3.5% in 2009.

With Cognizant, expectations from investors tend to be higher than Wall Street analysts, so a mere beat would not be enough.

"Consensus estimates are fairly conservative," said HFP Capital Markets analyst Cynthia Houlton, who expects see a lot of strength out of the United States.

About 80% of the company's revenue comes from North American customers, while a majority of its employees and development centres are located in India.

Since hitting a 52-week high of USD 48.95 on January 13, Cognizant's stock has shed 11% as broader markets slipped. Despite the recent decline, the shares have shot up 122% in the past year. They were trading at USD 44.07 in late morning trade Monday on Nasdaq.

"Shares have fallen back a bit, given the market volatility we've had," Houlton said. "So, a positive stock response is now easier."

The company has beaten profit estimates in the last three quarters.

For 2010, analysts expect Cognizant to post revenue growth of 20.2%, according to Thomson Reuters I/B/E/S.

Cognizant's announcement will come after strong numbers from its India-based rivals such as Tata Consultancy, Infosys Technologies and Wipro. The company also competes with larger players like Accenture, Hewlett-Packard and IBM.

The following table shows analyst estimates for the fourth quarter.

                             Q4 2009E    Q4 2008    % change

EPS                      $0.46            $0.38        21

Revenue (millionn) $888.4          $753.1     18

Gross margins (%) 43.92           44.26       -1