Cognizant: Economy, IT spending turning, but what's the new normal?

Cognizant Technology Solutions CEO Francisco D'Souza said that the company saw strong demand and that the "cyclical downtown that has mired the global economy over the 18-to-24 months appears to be turning."

Cognizant Technology Solutions CEO Francisco D'Souza said that the company saw strong demand and that the "cyclical downtown that has mired the global economy over the 18-to-24 months appears to be turning."

Cognizant, a fast-growing offshore outsourcing outfit, reported a strong first quarter Tuesday. The company reported earnings of $151.5 million, or 49 cents a share. Non-GAAP earnings were 53 cents a share, a nickel better than Wall Street estimates. First quarter revenue was $959.7 million, up 29 percent from a year ago.

The company also raised its outlook. The company forecast second quarter non-GAAP earnings of 55 cents a share on revenue of $1.02 billion. Wall Street was looking for 51 cents a share on revenue of $979.4 million.

Oppenheimer analyst Glenn Greene summed up the Cognizant quarter:

This quarter Cognizant's growth was spread across industry verticals and geographies. The "Other" segment comprising Telecom and High Tech companies delivered strong growth this quarter with revenue up 11.9% sequentially and 32.7% Y/Y. This spending was driven by pent-up demand in the Telecom sector where customers continue to expand the number of service offerings for their own clients (thus fueling Application Development projects). Retail, Manufacturing, & Logistics and Healthcare also delivered strong results with growth of 5.7% and 5.1% Q/Q, respectively. As evidence of the discretionary spending environment loosening, the sequential growth rate for Application Development outpaced the growth rate for Application Maintenance this quarter. The sequential ramp in application development signals that customers are now more willing to return their focus to long-term IT investment planning (partially due to "pent-up demand").

D'Souza's comments also provided good color. On the key topics:

On verticals on the move, D'Souza said:

In terms of industries we saw growth in Financial Services, as an environment of relative stability continued in that industry. Retail and Manufacturing delivered another strong quarter contributing significantly to both sequential and year-on-year results. Our other industry category also grew substantially, driven largely by success in the telecom and high-tech sectors. During the quarter we added five accounts that we consider strategic, and have the potential to ramp up to at least $5 million and more than $50 million in annual revenue; two from financial services, two from Retail and Manufacturing, and one from Healthcare and Life Sciences.

On Europe and the cautious outlook, D'Souza said:

The overall economic situation looks more positive but still tenuous. Demand and credit, prerequisites for business investment, are resuming some normalcy, yet unemployment gnaws at developed economies. And while the economies of many European nations are looking up, those still struggling -- Greece, Spain, Portugal, Italy among others -- could impact the broader European Union and the global economy. Consequently, our planning bias will remain cautious.

On pent-up demand, D'Souza said:

We are seeing some strength in discretionary spending in application development and we think that that's largely because essentially our clients have underinvested in their business over the last two years and now they -- as they turn back to their growth agendas they're starting to spend and re-- reinvest in their business.

But the big question is what happens when that pent-up demand plays out. D'Souza said:

The reality is that there is an awful lot of work that has not been done over the last couple of years that needs to get done. We don't know how much of that will get released and we don't know what the new normal is, so once that pent-up demand flushes through the system, it's unclear to us what the new normal of discretionary spending is going to be given that many of the industries that we serve are going through these fundamental secular shifts in business models and so on and so forth.

ERP spending is still a wild-card. D'Souza said:

We've seen some of the ERP vendors see an increase in license revenues so we think that that may be a good leading indicator, but remember that our business is only part -- our ERP business is only partially tied to new license revenues. At this point, our ERP businesses are -- I wouldn't say that we're seeing remarkable strength in those businesses...Within the core ERP, those businesses are doing well but I wouldn't characterize them as being on a remarkable growth trajectory at this point.