Cognizant profit soars but shares fall

NEW YORK - Cognizant Technology Solutions Corp. posted a 65 percent jump in third-quarter profit on Tuesday thanks to strong demand for its software development and maintenance services, which are mainly based in India.

Cognizant also raised its estimates for the rest of the year and forecast 2004 growth above the industry average of 30 percent.

But its shares fell $1.62, or 3.7 percent, to $42.26. Some analysts attributed the decline to profit-taking after a recent run-up to a six-year high.

"The outlook remains positive and the conference call was upbeat," said Ashish Thadhani, an analyst at Brean Murray & Co. "The only reason for the stock being down is perhaps profit-taking."

The company, headquartered in Teaneck, New Jersey, reported net income of $16 million, or 23 cents a share, up from $9.7 million, or 15 cents a share, a year earlier.

Revenue rose 60 percent to $98.1 million.

Analysts surveyed by Reuters Research, a unit of Reuters Group Plc, were looking for 22 cents a share and revenue of $93.8 million.

Looking ahead, its chief executive said it is still possible to retain 60 percent growth but will be hard to surpass it, given the increasing demand for modestly paid Indian engineers.

"It's tough for a people's business to grow faster than 60 percent," CEO Kumar Mahadeva told Reuters. "The biggest challenge we now have is to recruit and train people."

WAGES UNDER PRESSURE, PRICING REMAINS FIRM

U.S. companies are increasingly relying on India as a low-cost software development and maintenance center, boosting results at Cognizant, Infosys Technologies Ltd. and Wipro Ltd.

"The trend is unstoppable," said Thadhani, adding that wage inflation at the entry level there is several years away.

On average, an entry-level engineer in India is paid $6,000 a year, only a fraction of the salaries of U.S. counterparts. Mahadeva said while there is no short supply of junior engineers, competition for senior managers are tough.

Cognizant, which said its turnover rate was 17 percent during the quarter, increased its work force by 15 percent to 7,700 in the third quarter. It also raised its pipeline by 50 percent to 60 percent from last year.

Cognizant is looking to China for talent, Mahadeva said. But wage levels in China, though still much lower than those in the United States, are about 5 percent or 10 percent higher than India's.

"There is always competition for people," said Sandra Notardonato, an analyst at Adams Harkness & Hill. "Potentially there will be a little bit of increase in terms of wage rates."

But pricing remains firm, said Mahadeva. Cognizant expects fourth-quarter profit of 24 cents a share on revenue of $105 million, higher than analysts' consensus view of 23 cents and revenue of $99 million.

For 2003, Cognizant sees earnings of 86 cents a share, higher than the average analysts' view of 83 cents a share.

The company also said it signed a five-year outsourcing deal with European banking concern Credit Suisse Group. The company didn't specify the value of the deal.

® Reuters