Updated from 11:23 a.m. ESTSAN FRANCISCO -- Tech services firm Cognizant ( CTSH) suffered a massive selloff after reporting third-quarter earnings as investors appeared spooked by an apparent slowdown in IT spending. While the company reported third-quarter revenue and profit above expectations, its forecast for fourth-quarter growth forecast was lighter than in past years. During a conference call with analysts, Chief Executive Francisco D'Souza and CFO Gordon Coburn said they hadn't seen the typical flurry of fourth-quarter spending, known as a "budget flush," possibly stemming from macroeconomic concerns. The company's third-quarter net income rose to $96 million, or 32 cents a share, from $61 million, or 20 cents a share, in the same quarter a year earlier. Excluding stock-based compensation expenses, Cognizant earned 34 cents a share, beating analysts' consensus forecast of 32 cents, according to Thomson Financial. Revenue rose 48% to $559 million, edging past most forecasts. For the fourth quarter, Cognizant forecast earnings of 34 cents a share, excluding items, matching analysts' average estimate. The company is expecting revenue in the range of $590 million to $595 million, below the $598 million analyst consensus. Cognizant shares were recently down $7.47, nearly 19%, to $32.14, on volume that is nearly six times the average. The selloff hit other IT services and consulting firms. India-based Infosys ( INFY) saw its shares drop $3.49, or 7%, to $45.33. Accenture ( ACN) shares were recently trading down $1.49, or 4%, to $36.06.
Investors have been on edge because of the continued mortgage market turmoil wracking the financial services sector, from which Cognizant derives about 47% of its total revenue. The vast majority of that comes from U.S. based banks, brokerages and insurers. A string of multi-billion-dollar write-offs in recent days has crushed investors' hopes that the heaviest losses had been reported. Also, mortgage lender IndyMac Bancorp ( IMB), a Cognizant customer, announced a $203 million quarterly loss on Tuesday, nearly five times greater than projected. Executives from many tech services firms have said that they have little exposure to subprime problems because their services are not used to process subprime loans. Cognizant, for one, gets only 3% of its revenue from work related to the mortgage markets, according to CFO Coburn. But the concern is that credit market problems also stem from prime borrowers, and may lead to a credit freeze that could stall a major engine of banks' growth. Cognizant's executive team emphasized during the conference call that they have experienced no interruptions in business because of the credit market problems. Third-quarter financial services revenue rose 7% from the previous quarter, and 43% from the quarter. Results from Cognizant's recent client survey suggest that IT spending will increase in the coming year. "We're not seeing any different spending characteristics from financial services firms than from the rest of our business," said Coburn in an interview.
The weak fourth-quarter spending hit all sectors, said Coburn. In previous years, he said, clients have typically spent more than their budgets allowed, with most coming in the fourth quarter. This year, however, macroeconomic concerns may have limited that flexibility. Despite the weaker than expected fourth-quarter forecast, Cognizant shares are still attractively valued, says Ashish Thadhani of Gilford Securities. Thadhani estimates that Cognizant's shares are valued at 23 times his projection for earnings over the next four quarter. This falls near the midpoint of range of 20 to 25 for large Indian tech services firms, including Infosys, Wipro ( WIT) and Satyam ( SAY). "The market reaction today is not a fair reflection of underlying strength in business," said Thadhani. In 2008, he expects Cognizant to surpass its peers in revenue and earnings growth. Thadhani does not personally own shares of Cognizant. Gilford Securities has not performed investment banking work for the company in the past 12 months. Part of the selloff may stem from the language used during the conference call, says Thadhani. For instance, management did not say that they would "at least" meet their financial targets, which would imply confidence that they would safely exceed them. Also, concerns over the company's financial services business might have surfaced because growth in revenue from that sector lagged the company's overall growth.