M+E Connections

Cognizant is significantly accelerating its shift to digital services and solutions in response to growing demand from its clients in recent quarters, according to CEO Francisco D’Souza.

The goal is to help Cognizant’s clients “win in the digital economy by applying technology and analytics to change consumer experiences to drive sustainable growth, deploying systems of intelligence to automate and improve core business processes, and improving technology systems by deploying cloud and cyber security solutions,” he said Feb. 8 during an earnings calls for the company’s fourth quarter (ended Dec. 31).

Cognizant’s plan is to “aggressively scale its digital capabilities across geographies and industry segments through both organic investments, in areas such as re-skilling and new technology practices, and through acquisitions,” it said in a news release.

The company is also “intensifying” its merger and acquisition efforts to “expand intellectual property, industry expertise, and platform and technology capabilities, by focusing primarily on strategic tuck-in acquisitions,” it said.

Cognizant has already been on an acquisition spree in the past three years as it prepared for the digital shift. It made four full buyouts and two partial ones in 2016 alone. Eight of the company’s 16 acquisitions in the past six years were made from 2014-2016. Late last year, Cognizant announced its plan to buy Australia consulting firm and IT services provider Adaptra. Cognizant also announced early this month that it was expanding its operations in Hong Kong with the opening of a new office there.

The company also plans to improve operating margins and set a non-GAAP operating margin target of 22% in 2019, it said Feb. 8. Cognizant’s board, meanwhile, approved a plan to return $3.4 billion to shareholders over the next two years through a combination of share repurchases and dividends. That was part of a cooperation agreement that Cognizant said it reached with activist investor Elliott Management under which Cognizant will also be appointing three new independent directors.

Revenue for Cognizant’s fourth quarter grew 7.1% from a year ago, to $3.46 billion. Profit grew to $416 million from $424 million. The financial services sector accounted for the largest percentage of revenue, at 39.1% — a 3.5% increase from the same quarter a year earlier. Healthcare client revenue grew 5.6% to 29% of revenue, while manufacturing/retail/logistics widened 12.6% to 19.9% of revenue. Other sectors accounted for 12% of revenue. Despite its expansion outside the U.S., North America again accounted for the vast majority of revenue, at 78.4%, up 7.2% from a year earlier.

For the full year, revenue increased 8.6% to $13.5 billion. Digital revenue accounted for about 23% of Cognizant’s total revenue for the year and is “growing well above the company average,” D’Souza said on the call.

The company expects to report revenue of $3.51 billion-$3.55 billion for the first quarter of 2017 and revenue of $14.56 billion-$14.84 billion for the full year. Its shares were up 3.12% at $55.47 in late morning trading after the earnings call.