Gettin' Better All The Time

Some of the country's top solution providers keep getting stronger. Maybe they've been taking vitamins this winter. But as winter gives way to spring, Wall Street expects continued strength among many VARBusiness 500 firms, which are expected to post stronger earnings this quarter over what they did a year ago.

For example, the 20 analysts who cover Accenture (No. 5 on the 2004 VARBusiness 500) expect the company's most recent quarter, which ended in February, to yield 32 cents per share (an average of their estimates) for stockholders. That's up 3 cents from the 29 cents per share of profit it produced in the year-ago period. In addition, 15 analysts expect Computer Sciences Corp. (VB500 No. 3) to come in with $1.08 per share for its quarter ending in March, up from the $1.01 per share the integrator made during the same quarter last year.

Similarly, offshore IT services provider Cognizant Technology Solutions (VB500 No. 102), based in Teaneck, N.J., will see earnings climb 33 percent if analysts are correct. Nineteen are predicting an average 21 cents per share for its quarter ending March, up from 14 cents per share quarter-over-quarter.

"Cognizant expects growth in several areas in 2005," says Gordon Coburn, the company's executive vice president and CFO. "First and foremost, the range of work that our clients want to do offshore continues to expand. Historically, it has been application management and simple development projects. We expect, in 2005, that clients will want to do complex, large development projects, infrastructure-management services and BPO. The slice has expanded and will continue to expand."

Coburn also says the number of customers in vertical markets embracing offshore have expanded, starting with financial services and moving to health care, manufacturing and retail, which grew 83 percent last year. In fact, Cognizant recently hired Ron Glickman to head its retail practice, Coburn says. "Deal sizes are getting bigger and the adoption rate is expanding," he adds.

Finally, the company is growing its strategic accounts, which Coburn defined as those generating $5 million to more than $40 million annually in revenue for the company. Cognizant has 48 such customers going into 2005, an all-time high.

Health-care integrator Cerner (VB500 No. 62), with close to $1 billion in annual sales, should also have a strong quarter, with per-share estimates up close to 25 percent from actual results for the same quarter last year. Company watchers expect 42 cents per share, up from 33 cents one year ago. "Those estimates are in our guidance range. Tactically, that first-quarter increase is in the 30 percent range," explains Marc Naughton, Cerner CFO.

"The reason for our continued growth is that we are providing technology to the health-care market, which is the least automated and [among the] biggest sectors, with HP, Oracle and IBM as our largest partners," Naughton says. Software accounts for 25 percent of its revenue, and consulting represents 30 percent--both are healthy margin segments.

"Our consulting net margins are upward of 20 percent. Our goal is to get them up to 30 percent," he adds. "Overall operating margins are at 12 percent. Our goal there is to drive them to 20 percent."

Similarly, Affiliated Computer Services in Dallas (VB500 No. 19) has 23 analysts expecting it to turn in an average of 80 cents per share, up from its year-ago EPS of 67 cents per share. Even Plano, Texas-based EDS (VB500 No. 2), plagued by a number of challenges, is expected to outdo its year-over-year performance. The 18 analysts who follow it are calling for 3 cents per share, up from a loss of 6 cents.

Strong Forecast Continues

These solid expectations follow equally rousing quarterly earnings news from some of these same VARBusiness 500 firms. For example, CSC analysts expected the company to record 80 cents per share. In fact, the El Segundo, Calif.-based VARBusiness 500 company outperformed the estimate and came in at 82 cents per share for its fiscal 2005 third quarter ended Dec. 31. Net income was $157.5 million.

That performance is significantly better than last year's fiscal 2004 third quarter, when the integrator posted earnings of 68 cents per share. Sales were up 5.6 percent to $3.52 billion quarter-over-quarter. The company attributed the good news to cost management, the improvement of contract execution and new business operational processes.

Analysts expected health-care integrator Cerner, for its fourth quarter ended Jan. 1, to deliver earnings of 54 cents per share. In fact, it did better than that, delivering earnings of 56 cents per share for the quarter, a record for the Kansas City, Mo.-based integrator. Total net earnings were $21.4 million, up 32 percent over the $16.2 million the company posted during the same three months last year.

The company expanded margins and cash flow while implementing a record number of its Millennium solutions during the quarter, says Neal Patterson, Cerner's co-founder, chairman and CEO.

Cerner's total sales for the three months were $248.2 million against $227.4 million for the same period last year. Annual revenue was $926.4 million, up from $839.6 million in 2003.

Austin, Texas-based Perficient (VB500 No. 426) was shaping up to deliver quarterly earnings of 5 cents per share, according to analysts, but surprised them with a report of 6 cents per share. Total net income climbed into the seven figures: $1.3 million, up a whopping 150 percent, compared with the $534,000 it posted during the fourth quarter of 2003. Sales for the quarter, net of reimbursed expenses, zoomed 180 percent to $20.9 million, compared with $7.5 million during the fourth quarter of 2003.

"It was a bigger-than-expected software quarter," says Jack McDonald, Perficient's CEO. "It was attributable to the fact that since cash on corporate balance sheets is at a post-war high, businesses are starting to address projects they had shelved. Add to that the fact that maturing technologies are really driving process efficiencies, and we got a better-than-expected quarter."

Behind the strong showing, Perficient says, is its new position as the leading WebSphere and enterprise application-integration consultancy in the central United States. Perficient added more than 170 clients to its business. In addition, it also accelerated its goal of reaching $100 million in sales by the end of the year.

Pomeroy IT Solutions, meanwhile, was among the few that disappointed The Street, where analysts, according to Thomson First Call research, were calling for earnings of 31 cents per share for its fourth quarter. Actual earnings came in 1 cent below, at 30 cents per share for the Hebron, Ky.-based solution provider. Earnings were still up 25 percent over the same 90 days last year, when the solution provider posted earnings of 24 cents per share.

Sales for the quarter climbed to $208.4 million, a 27.9 percent jump from year-over-year numbers. Sales for Q4 2003 were $163 million. For its FY 2004, the solution provider checked in with diluted earnings per share of $1, against 74 cents. Revenue for the year increased 24 percent to $742.3 million vs. $598.4 million.

On the other hand, Cognizant had a spectacular fourth quarter, with profits up 73 percent on increased business demands. It beat the poll of Thomson First Call analysts, who expected 19 cents per share on revenue of $169.6 million. In fact, the company earned 21 cents per share on revenue of $172.8 million. Last year for the three-month period, the company earned 13 cents per share on sales of $155.4 million. That's an 11 percent revenue gain quarter-over-quarter. The company has added 1,300 workers, bringing its total workforce to 15,300.

For the year, the company earned $100.2 million, or 70 cents per share, with sales of $586.7 million. The solution provider again bested analyst expectations, which forecast a profit of 69 cents per share.

For the first quarter of 2005, Cognizant expects earnings of 21 cents per share, in line with analyst expectations, on sales of $180 million. For the year, it expects revenue of $829.7 million and earnings per share of 96 cents, ahead of analysts--who expect 93 cents per share.

On the Flip Side

In other VARBusiness 500 quarterly earnings news, Alexandria, Va.-based Halifax (VB500 No. 337) had a rough third quarter 2005 ended Dec. 31. Its net loss for the quarter--its first in 15 quarters--was $1 million, or 33 cents per share, vs. $202,000, or 7 cents per share, for the same quarter last year. Company officials attributed the loss to an enterprise maintenance contract that had higher-than-expected ramp-up and operating costs, as well as product failure rates. Not only that, the loss was $185,000 greater than forecasted just last month. The company says it now has costs and pricing under control and expects to return to profitability.

On the positive side, Halifax posted a 17 percent increase in sales, with $15.6 million in revenue for fiscal Q3 2005 against $13.4 million for the year-ago period.

Meanwhile, En Pointe Technologies (VB500 No.119) enjoyed its sixth profitable quarter in a row and posted sales up over 18 percent for its first quarter of 2005, which ended Dec. 31. The Los Angeles-based solution provider posted net income of 4 cents per share, a 25 percent year-over-year gain. Sales climbed to $75.3 million over $63.6 million. Service revenue, however, was off 2.4 percent quarter-over-quarter, down to $11.4 million from $11.7 million.

"We focused on our sales staff and making sure that our executives were out in the field driving customer activity," says Kevin Schatzle, En Pointe senior vice president, who adds the company continued its shift from hardware to services and licensing software. As for that services revenue, the solution provider's major customer, a Fortune 10 company representing approximately 7 percent of all services revenue, outsourced its help desk in July. The numbers hit during the fourth quarter. "Still, we replaced almost all of it," Schatzle says.

MTM Technologies (VB500 No. 312), which has been on a buying spree, boasted a 101 percent revenue increase to $29.7 million for its third quarter ended Dec. 31. Although it lost $800,000 during the three months, or 13 cents per share, Frank Alfano, its CEO, told VARBusiness that it was attributable primarily to a $1 million noncash accounting charge related to convertible notes. Better, he says, to focus on its quarterly Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)--an approximate measure of a company's operating cash flow--which was $800,000 for the quarter. Its EBITDA for the previous quarter was a loss of $371,000, a positive swing of more than $1 million. Additionally, the solution provider's number for the fourth quarter was better than the same quarter last year, when the Stamford, Conn.-based midmarket player posted a net loss of $1.4 million, or 31 cents per share.

"Our performance was attributable to some notable sales increases and an improvement in gross-profit margins," Alfano explains, noting that MTM Technologies' improved gross-profit margins were attributable to the sale of higher-end product, services growth and the acquisitions of services-oriented companies, which offer higher margins.

Enterprise CRM services and solutions company eLoyalty (VB500 No. 286) reported increased earnings--although still a loss--and sales for its fourth quarter of 2004. The Lake Forest, Ill.-based company lost $1.1 million, or a loss of 23 cents per share, compared with the same quarter last year, when it lost $4.9 million, or 89 cents per share. Sales for the quarter were up 34 percent to $20 million.

Finally, Montreal's CGI Group (VB500 No. 41) for its first quarter of 2005 reported net earnings, after stock-options expensing, increased 25.4 percent to $43 million, from $34.3 million in the same quarter last year. Sales climbed 37.4 percent to $766.1 million. CGI also announced that as of Dec. 31, it had a $10.5 billion backlog in signed contracts.