C ognizant Technology Solutions ( CTSH ) is no stranger to the acquisitions game. The provider of information technology, consulting and business process outsourcing has made 16 buys since 2010. Its acquisition strategy has been to focus on geographic expansion and strengthening its industry knowledge or technological abilities, Cognizant President Gordon Coburn told IBD.
Until recently, most buys had been tuck-in acquisitions for $200 million or less. The exception came in November, when Cognizant closed on the $2.7 billion purchase of TriZetto, a privately held provider of health-care IT software that helps payers and providers work more efficiently together.
TriZetto could have wound up elsewhere, though few firms could have provided a healthier home. OnlyIBM ( IBM ),Accenture ( ACN ) andInfosys ( INFY ) enjoy larger market caps than Cognizant’s $40.9 billion in IBD’s Computer-Tech Services industry group, althoughWipro ( WIT ) isn’t far behind. But Cognizant is the only member of the industry group to earn the highest possible 99 Composite Rating.
At the time of the purchase, TriZetto software managed the health benefits of close to half the insured population of the U.S. and supported about a quarter of all U.S. care providers with more than 350 health plans.
TriZetto broadened the offerings of Cognizant’s already fast-growing health-care segment, which provides health insurers, drug companies, biotech and other health-related businesses with services that address regulatory requirements, including compliance with the Affordable Care Act. At the time of the buy, Cognizant’s health-care segment served more than 200 clients and accounted for about 26% of sales.
New Software Platforms
“TriZetto further strengthened our position in health care,” Coburn told IBD. “TriZetto is the leading platform in health care administration.
“Most important, TriZetto brought us (software) platforms (complementing) technology and business process services” that Cognizant already offered.
Coburn says that with TriZetto in the mix, Cognizant is expanding from being a services provider to a combination of providing both services and platform products.
“That’s a key component of our growth for the future in the health-care industry as well as other industries,” he said, adding that Cognizant’s strategy is to “buy, build and partner,” using those platforms across various industries.
He says there will be “similar (growth) opportunities” in financial services and pharmaceuticals due to “changes in the regulatory environment, cost pressures and changing industry dynamics.”
The financial services segment is Cognizant’s biggest business, accounting for 41.8% of revenue in 2014. Its manufacturing, retail and logistics segment accounted for 20.4% of 2014 revenue.
An IBD Leaderboard stock, Cognizant has been on a long-running winning streak with 16 straight quarters of double-digit sales and earnings growth.
In the second quarter, adjusted earnings rose 20% to 79 cents a share, ahead of views. Revenue climbed 23% to $3.09 billion, also topping forecasts. Cognizant also raised its full-year 2015 earnings and revenue estimates for the second time this year.
Cognizant’s stock rose 6.4% on Aug. 5, the day it reported second-quarter results. Its stock continues to hover near its all-time closing high of 68.44.
“This is a company where revenue growth is by far the main driver of its valuation,” said Robert Baird’s David Koning. Year-to-year “revenue growth in Q2 was the strongest in almost two years in both reported and organic and constant currency revenue.”
Koning says the “backdrop” to support strong revenue growth is Cognizant’s “good execution and willingness to invest in growth along with an industry backdrop that’s still in a secular growth mode.”
The industry’s growth mode, he says, is being driven by companies’ willingness to spend on offshore IT and certain vertical segments having “solid underlying growth.”
The health care segment was the quarter’s fastest grower, with a 39% rise in revenue.
TriZetto contributed about $171.1 million in sales and was one of the “drivers” of the big gain, said CEO Francisco D’Souza on the quarter’s conference call.
Koning calculates that the offshore IT services industry has grown organic revenue on a constant currency basis about 10%-13% annually over the past few years, while Cognizant has grown around the mid-teens to 20%.
How has Cognizant kept up such a fast pace?
“When we went public in 1998, we made the decision to keep margins at between 19% and 20%, which was lower than many of our competitors at the time, and use that money to invest for the long term and deliver industry leading revenue growth,” Coburn said. “We’ve continued to successfully execute on this strategy ever since.”
He says Cognizant has invested in having “strong global delivery capabilities combined with deep industry knowledge and strong client relationships.”
He added: “Our customers today have a dual mandate. They have to run their businesses better by becoming more efficient and effective. And they have to run their businesses different through digital (transformation) and how they interact with customers, employers and the supply chain. They do this by taking the money they’ve freed up from running better and investing it in running different.”
Serving The Dual Mandate
“We’re one of only a small number companies that can do both of those things at once,” he said. “The core of our strategy is to serve clients on both sides of the dual mandate.”
In the last year or so, he adds, Cognizant has seen “very strong demand” from customers in implementing digital transformation within their businesses.
“We’ve experienced explosive growth in this area,” he said.
Analysts polled by Thomson Reuters expect Cognizant’s earnings to grow by 17% in 2015 to $3.03 a share. They see a 15% increase in 2016 and a 16% gain in 2017.
“The combination of all the changes related to the Affordable Care Act and the aging of the population creates a nice backdrop for growth in Cognizant’s health-care segment, which represents about 30% of the company’s revenue,” said Koning. “We believe the backdrop is solid, but it’s hard to predict when the ebbs and flows come.”
Other highly rated members of IBD’s Computer-Tech Services industry group includeEpam Systems (EPAM) andCDW (CDW).