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Accenture's Outsourcing Business Drives Growth, Risks Linger - Analyst Blog

On Feb 23, we issued an updated research report on Accenture plc (ACN).

The company started fiscal 2015 on a strong note with both the top and bottom lines improving year over year as well as surpassing the respective Zacks Consensus Estimate. The year-over-year growth reflects increased focus on the Outsourcing business and new bookings. Additionally, another encouraging factor was the revenue increase in the Consulting business.

Accenture’s solid performance across insurance, banking and healthcare segments reflects strong demand for its services, boosting long-term growth prospects. The company has been steadily gaining traction in its Outsourcing business. The success is primarily attributed to the increase in demand for technology that can improve operating efficiencies and save costs.

The upward trend continued during the first quarter of fiscal 2015, with Outsourcing revenues growing 11% on a year-over-year basis. The improvement mainly resulted from the rising demand for Accenture’s outsourcing solutions driven by most of its operating industry groups across all geographic regions.

Furthermore, considering the growing need for digital marketing, we are encouraged by Accenture’s efforts toward enhancing its digital marketing capabilities through acquisitions. According to the U.S. IT research firm Gartner, companies have spent nearly 10.2% of revenues for marketing in 2014, of which one-fourth was invested in digital marketing. The report also suggests that 51% of the companies are planning to increase the digital marketing spending by 17% in 2015 on an average.

Accenture made several acquisitions last year to expand its product and service offerings as well as client base, including Reactive Media Pty Ltd., an Australian digital services provider; Hytracc Consulting, a specialist in providing hydrocarbon and revenue accounting services to oil and gas Companies; Enkitec, an Oracle Platinum partner and a worldwide leader in Oracle Exadata implementations and Oracle database administration and development; and i4C Analystics, an Italian advanced analytics software platform provider.

These acquisitions have enabled Accenture to enter newer markets, diversify and broaden its product portfolio and maintain the leading position. We believe that the company’s continued acquisitions are expected to boost its revenue stream.

However, we remain cautious as Accenture cut the fiscal 2015 earnings forecasts to account for the negative impact from foreign exchange rates. Furthermore, the operating margin is expected to stay range-bound in fiscal 2015, which led management to reiterate its earlier guidance range of 14.4% to 14.6%, marginally higher than the fiscal 2014 level of 14.3%.

Moreover, increasing competition from Cognizant Technology Solutions (CTSH) and IBM (IBM) and a strained spending environment remain other challenges.

Currently, Accenture carries a Zacks Rank #3 (Hold). A better-ranked stock in the consulting industry worth considering is CBIZ Inc. (CBZ), sporting a Zacks Rank #1 (Strong Buy).


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