Accenture's Earnings Beat, Revs In Line

Zacks

Accenture plc (ACN) reported second-quarter fiscal 2013 earnings per share (EPS) of $1.00, beating the Zacks Consensus Estimate of 97 cents. Earnings increased 3.1% from the year-ago quarter attributable to higher revenues, non-operating income and margins and lower share count, partially offset by foreign-exchange headwinds.

Revenues

Accenture reported second-quarter net revenue of $7.06 billion (foreign exchange impact was negligible), up 3.8% from $6.80 billion in the year-ago quarter. Net revenue was within the company’s guided range of $6.90 billion to $7.15 billion but was in line with the Zacks Consensus Estimate. Revenue growth was driven by strength in three operating groups in Outsourcing and geographically in the Americas. However, this was partially offset by a soft Consulting business and Euro issues.

Among the operating segments, Health & Public Services and Financial Services generated double-digit revenue growth (13.0% and 10.0%, respectively), which was supported by mid single-digit growth (6.0%) in Product revenues. This was offset by decline in Communications, Media & Technology (-5.0%) and Resources (-3.0%) revenues.

Consulting revenues dropped 1.0% year over year to $3.75 billion. Consulting revenues dropped as a result of the breakup of projects into smaller phases by corporate customers. However, Outsourcing revenues increased 9.0% from the year-ago quarter to $3.31 billion.

Geographically, year-over-year increases of 8.0% and 1.0% were seen in top-line contributions from the Americas and the Asia Pacific, respectively. Accenture’s performance in the Europe, the Middle East and Africa (:EMEA) region amid the prevailing debt concern remained flat compared to the year-ago quarter.

Bookings

Total new bookings for the second quarter were $9.1 billion, reflecting no foreign-currency impact. Consulting bookings were $4.4 billion and outsourcing bookings were $4.7 billion.

Operating Results

Second-quarter gross margin increased 50 basis points (bps) year over year to 31.6%. Gross margin expansion was supported by improved contract profitability (mainly in Outsourcing), higher utilization rate and lower attrition rate.

Total operating expenses increased 5.1% year over year due to an increase of 8.0% in sales and marketing expenses and 0.3% in general and administrative expenses. Operating margin was 16.5%, up 340 bps year over year, mainly due to a one-time gain.

Accenture reported net income of $1.18 billion or $1.65 a share, up from $704.5 million or 97 cents in the year-ago quarter. Excluding the reorganization benefit and final determinations of prior-year tax liabilities of 65 cents, adjusted earnings per share were $1.00.

Balance Sheet & Cash Flow

Operating cash flow was $634.2 million in the reported quarter compared to operating cash usage of $108.8 million in the prior quarter. Net property and equipment additions were $90.2 million, up from $86.5 million in the prior quarter. Total cash balance decreased to $5.64 billion from $5.68 billion in the preceding quarter. Accenture carries no significant long-term debt burden.

Share Repurchase and Dividend

During the second quarter, Accenture repurchased 8.8 million of its common outstanding shares for a total value of $609.0 million. The activity includes 5.5 million shares repurchased in the open market. As of Feb 28, 2013, Accenture had roughly 693 million shares worth $3.6 billion outstanding under the current authorization.

Accenture also paid a semi-annual cash dividend of 81 cents per share in the reported quarter.

Guidance

For the third quarter of fiscal 2013, Accenture expects net revenue in the range of $7.25 billion to $7.50 billion, reflecting decent sequential growth at the mid-point. This figure was arrived at after considering a 2.5% negative foreign-exchange impact. The company did not provide any third quarter update on EPS, but the Zacks Consensus Estimate is pegged at $1.16.

For full fiscal 2013, management expects net revenue growth on the lower side of the previously expected range of 5.0% to 8.0% due to softness in Consulting business arising from lower corporate spending. Expectation for new bookings remains in the range of $31.0 billion to $34.0 billion. The company continues to expect operating margin (excluding benefits related to final determinations of prior-year tax liabilities and the reduction in reorganization liabilities) in the range of 14.1% to 14.2% and annual tax rate between 26.0% and 27.0%. Earnings per share (excluding benefits related to final determinations of prior-year tax liabilities and the reduction in reorganization liabilities) expectation is between $4.24 and $4.32. However, the Zacks Consensus Estimate of $4.28 is slightly lower than the midpoint of the company's expected range.

Recommendation

We find Accenture’s secondquarter results a mixed bag with the bottom line beating the Zacks Consensus Estimate and the top line matching the same. Growing focus on outsourcing business, operating cost optimization, new booking growth and continuous return of shareholder value were the quarter’s positives. Though weak consulting business could be a reason for concern, management seems confident that growth in outsourcing will mitigate the loss. Also, management’s commentary at the conference call to continue investing in priority industries (such as Communications), emerging markets, and geographical expansion as well as its efforts to boost its brand value could act as a catalyst for the stock.

Also, improved bookings growth and solid performances in insurance, banking and healthcare areas reflects strong demand for Accenture’s services, boosting long-term growth prospects. But obviously, the Consulting business would need special attention as its performance can put a lid over the overall result.

Apart from this, increasing competition from Cognizant Technology Solutions Corp and International Business Machines Corp. (IBM), a strained spending environment and Accenture’s broad European exposure (roughly 40.0%) may temper its growth prospects to some extent.

Currently, Accenture has a Zacks Rank #4 (Sell) primarily due to downward estimate revisions by analysts. But not all similar stocks are performing as badly as Accenture. Investors should consider CRA International Inc. (CRAI) and Information Services Group Inc. (III), which have a Zacks Rank #1 (Strong Buy) and are worth buying.

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