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Cognizant CEO D'Souza: Shifts In Health-Care Market, Including CVS-Aetna Merger Rumors, 'Play To Our Strengths'

The solution provider says its intellectual property, software and personnel strengths are key drivers in its health-care business segment, which saw fiscal third-quarter revenue increase 9.3 percent year over year to $1.085 billion.

The shake-ups expected to take place in the health-care market are actually benefiting Cognizant, which sees further growth opportunities in that space around its Business-Process-as-a-Service offering.

"Change plays to our strengths, actually," Cognizant CEO Frank D'Souza told Wall Street analysts Wednesday on the company's fiscal third-quarter earnings call. "As the market changes and evolves, we have a very strong end-to-end portfolio of services, whether that's consulting to help our clients figure out what they need to do to respond to the changes, operating in terms of our BPaaS offerings or whether that's on the technology front as they think about modernizing."

The Teaneck, N.J.-based professional services powerhouse, No. 7 on the 2017 CRN Solution Provider 500, cited the company's intellectual property, software and personnel strengths as key drivers for its health-care business segment, which saw fiscal third quarter revenue increase 9.3 percent year over year to $1.085 billion.

[Related: Cognizant To Acquire Top Adobe Partner Netcentric To Boost Its Digital Marketing Prowess ]

President Rajeev Mehta said that Cognizant health-care customers, most notably insurance payers, have shown increased interest in digital, analytics, cloud and virtualization solutions. The rise of provider-sponsored insurance plans at large health-care firms also has created opportunity for Cognizant, he said.

Mehta was later asked whether the rumored CVS-Aetna merger has affected any of the company's industry dealings.

"We're not seeing any conversation impacts right now of any potential acquisitions," Mehta said during the earnings call. "We've invested a lot in our health-care business. We see strong growth in midsize payers as well as large-payer companies out there. In addition, we continue to see a lot of opportunity around our BPaaS solutions."

CFO Karen McLoughlin added that it was "too early to tell" what the implications of those reported talks might be.

Cognizant remains busy on the acquisition front, with four acquisitions in the past five months. The solution provider bought TMG Health in June, health-care consulting firm T2C in September and a pair of digitally focused European companies in October – digital marketing specialist Netcentric and digital agency Zone.

Netcentric and Zone will become part of Cognizant's digital business division, D'Souza said, with both operating independently. But the company will implement a revenue synergies plan centered on delivering Netcentric and Zone marketing capabilities across Cognizant's customer base.

"We do a tremendous amount of marketing work today for our clients across all three practice areas. … These acquisitions will allow us to put a front end on a lot of the work that we're doing and take that to clients in a more integrated and holistic way," D'Souza said. "That's our broad plan."

CFO McLoughlin said Cognizant's digital business, which accounted for 26 percent of total revenue last quarter, continues to grow 25-plus percent year over year.

Banking and financial services, the slowest performer of Cognizant's four vertical segments, grew 3.8 percent year over year primarily due to success with insurance and regional banking clients. However, President Mehta said the company has endured "continuing weakness" in its dealings with large banks, as they prioritize reducing their legacy system costs and redirect the savings toward digital-side investment.

The company is hopeful that its legacy dealings with these banks will translate to further digital opportunities down the road, although D'Souza and Mehta at the same time said the company is engaged with "many" digital opportunities at those banks.

Both the products and resources as well as communications, media and technology segments grew by double digits during the quarter, at 14 and 18.2 percent, respectively.

Cognizant reported revenue of $3.77 billion for the third fiscal quarter ended Sept. 30, up 9.1 percent from last year's third-quarter mark of $3.45 billion. That beat Seeking Alpha's projections by $10 million.

Net income for the quarter was $495 million, or 84 cents diluted earnings per share, up from $444 million, or 73 cents diluted per share, compared with the year-ago quarter. On a non-GAAP basis, Cognizant reported net income of $754 million, or 98 cents per share, up 13 percent from $667 million, or 86 cents per share. The performance beat Seeking Alpha's third-quarter projections by 3 cents per share.

Cognizant's stock price fell 16 cents (0.21 percent) to $75.51 in pre-market trading Wednesday. The company said it will be paying a cash dividend of 15 cents per share on Nov. 30.

Cognizant has adjusted its full-year guidance as a result, now projecting $14.78 billion to $14.84 billion in revenue by the end of 2017, with 9.5 percent to 10 percent year-over-year growth. The solution provider is in the midst of a cost optimization plan that's targeting 22 percent non-GAAP operating margin in 2019 – something McLaughlin said affected Cognizant's abnormally high headcount attrition rate of 22.5 percent during the quarter.

"Partially due to continuing impact of performance management and severance programs in first half of the year, we did see an increase in voluntary attrition during the quarter," she said. "We will of course carefully manage headcount, we will continue to hire and invest in critical skills needed to grow digital business and bring voluntary attritions back to a normal level."

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