Investors Cheer On Cognizant

Th shares moved higher Monday after the IT outsourcing company reported a jump in quarterly profit

Cognizant Technology Solutions (CTSH) once again announced a stronger profit on Feb. 5. The former Dun & Bradstreet (DNB) unit, based in Teaneck (N.J.), has steadily grown its net income in recent years by using well-educated, low-paid information technology services workers mainly in India. But it's been getting tougher to find bargains in India these days.

In the 2006 fourth quarter, Cognizant's income surged to $69.5 million, up 20.5% compared to the same period of 2005. "As demand for our services has escalated, we have maintained our long-term focus on expanding our strategic platform," said Cognizant CFO Gordon Coburn in a press release Feb. 5. "Investment in recruitment, retention and training are central to our strategy."

As the industry matures, IT services companies are battling one another for talent in India and hiking salaries in the process. The Nasscom Hewitt "Total Rewards Study" found that the average salary increase in the Indian IT sector was in the range of 16% in 2005.

Now Cognizant hasn't been able to squeeze as much profit out of its sales; its operating margin for the quarter was 18.0%, compared to 20.1% during the same period of 2005. But the company has been taking steps to address that problem. For example, Cognizant is searching for talent in new areas and recently opened a development center in Kochi, its eighth city in India. It's also making steady, long-term investments in China.

Whatever setbacks the company might face, its sales continue growing at a solid cilip and offsetting costs. Cognizant is moving into newer customer markets too, such as Continental Europe, where business more than doubled in the last year. Cognizant's revenue for the fourth quarter of 2006 increased to $424.4 million, up 65% from the fourth quarter of 2005.

"We think operating margins will be roughly flat this year, in spite of Cognizant's continued investment in its business, rising wages for IT workers in India, and elevated levels of attrition," Standard & Poor's equity analyst Dylan Cathers said in a Feb. 5 research note. (S&P, like, is owned by The McGraw-Hill Companies.) Cathers hiked forecasts on the company's earnings and revenue growth for 2007, bringing S&P's 12-month target price up by $10 to $98. "Cognizant continues to win contracts and expand globally, notably into Europe," Cathers explained.

Most investors appeared to keep their faith in Cognizant's strategy. After the news Feb. 5, they bid up Cognizant's stock 8.3% to $92.99 in late trading on the Nasdaq.

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