Summary
- Contino brings high-profile client names, such as Morgan Stanley, Adidas, and Dow Jones.
- Contino's SMAC offerings help CTSH expand to Great Britain and Australia markets.
- Our preliminary estimate calls for 80 bps of annual revenue growth acceleration from this transaction.
Background:
On October 16, Cognizant announced its acquisition of Contino, a European technology consultancy firm. Over the last two weeks we conducted research on this transaction, trying to assess the immediate impact in terms of synergies and culture. We present our key findings below, in addition to commenting on the company's latest earnings print.
Company Description:
Cognizant focuses on three core verticals: Financial Services, Healthcare, Manufacturing / Retail / Logistics, which collectively make up about 90% of its revenue base. The Financial Services vertical focuses on banking/transaction processing, capital markets and insurance services. The Manufacturing/Retail/Logistics group includes manufacturers, retailers, travel and other hospitality customers. The Healthcare group includes largely healthcare providers and payers. In addition, the company also has clients in media, entertainment, high tech, and telecom groups, albeit its presence in those segments is much smaller than that of its core competitors, such as Accenture, Infosys, and IBM.
Why Does Contino Make Sense for Cognizant?
New and Different Client Outreach: Contino both adds to Cognizant's client base and diversifies it with new digital consulting offerings. Among such clients are Dow Jones, Barclays, Morgan Stanley, Adidas, Lloyds Bank, Vodafone and Morgan Stanley. We expect that for some of these clients revenue could rise by as much as 50%, though we do not have precise estimates of how much revenue each client delivers for CTSH. Given the list above, we see the Financial Services vertical getting a particularly strong boost.
Geographic Outreach: While we do not see much impact from the US market (recall, Cognizant already derives about 81% of total revenue from the United States), expansion into the United Kingdom and particularly Australia is a major positive for the diversification of the company's revenue stream.
Incremental to SMAC Offerings: Contino's work is largely focused on what Cognizant calls its SMAC (Social, Mobile, Analytics, Cloud) / Horizon 3 deliverables. SMAC already brings solid double digit growth, which we see accelerating with the new acquisition. It is our understanding that Contino has solid partnerships with Amazon's AWS, Google's Cloud Platform, and Microsoft's Azure. With Cognizant also in sync with some of these players, we envision a lot of potential for revenue growth acceleration.
Expect As Much As 80 Bps of Revenue Growth Acceleration: While the devil is in the details, we believe that the impact from this deal may result in as much as 80 bps of revenue growth acceleration, though we are more cautious about the operating margin expansion since we do not yet know about all the incremental costs involved. A lot will depend on the percentage allocation across verticals (not only Financial Services, but also Retail and Telecom).
