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Accenture (ACN) Q1 Earnings Top Estimates, Revenues Miss

Zacks Equity Research

Accenture plc ACN reported mixed first-quarter fiscal 2017 results.

Its first quarter fiscal 2017 earnings per share (‘’EPS”) of $1.58 beat the Zacks Consensus Estimate of $1.49. Also, earnings increased on a year-over-year basis, primarily attributable to higher revenues, lower tax rate and share count.

Revenues and Bookings

Though Accenture’s first quarter net revenue increased 6% year over year to $8.515 billion, it missed the Zacks Consensus Estimate of $8.571 billion. In local currency terms, revenues increased 7% year over year. Net revenue also came within the guided range of $8.40 billion and $8.65 billion.

The year-over-year increase was primarily aided by a 6% increase in Consulting revenues ($4.59 billion). Outsourcing revenues increased 7% on a year-over-year basis ($3.92 billion). It is worth mentioning that both Consulting revenues and Outsourcing revenues increased 7% in local currency.

Among the operating segments, Communications, Media & Technology revenues were up 5% on a year-over-year basis to $1.69 billion. Revenues from Health & Public Services and Financial Services increased 5% and 4% year over year to $1.50 billion and $1.81 billion, respectively. Revenues from Products increased 17% on a year-over-year basis and came in at $2.32 billion. Resources, however, decreased 4% on a year-over-year basis to $1.19 billion during the quarter.

Geographically, revenues from the North Americas and Europe increased 6% and 2% on a year-over-year basis, respectively. Revenues from Growth Markets (Asia Pacific, Latin America, Africa, the Middle East, Russia and Turkey) increased 17% on a year-over-year basis.

Accenture reported new bookings of $8.3 billion during the quarter, which were negatively impacted by foreign currency fluctuations. Consulting bookings and Outsourcing bookings for the quarter amounted to $4.9 billion and $3.4 billion, respectively.

Operating Results

First quarter gross margin increased 10 basis points (bps) on a year-over-year basis to 32.1%, primarily due to a higher revenue base.

Combined sales and marketing expenses and general and administrative costs increased 4.5% from the year-ago quarter to $1.40 billion. However, as a percentage of net revenue, these expenses were down 30 bps on a year-over-year basis to 16.4%.

Accenture’s operating income was $1.33 billion or 15.6% of net revenue compared with $1.22 billion or 15.2% of revenues reported in the year-ago quarter. Accenture reported $1.05 billion in net income or $1.58 per share compared with $858 million or $1.28 per share reported in the year-ago quarter.

Balance Sheet & Cash Flow

Accenture exited the quarter with total cash balance of $4.08 billion compared with $4.91 billion in the preceding quarter. Accenture’s long-term debt balance at the end of the first quarter was $24.6 million.

Operating cash flow was $1.08 billion in the reported quarter while free cash flow was $1 billion.

Share Repurchase and Dividend

In line with its policy of returning cash to shareholders, Accenture repurchased 5 million shares for $588 million during the first quarter. The company declared a semi-annual cash dividend of $1.21 per share (an increase of 10%) during the quarter.

Guidance

For the second quarter of fiscal 2017, Accenture expects net revenue between $8.15 billion and $8.40 billion (mid-point $8.275 billion). The Zacks Consensus Estimate is pegged at $8.474 billion. The company did not provide any earnings per share guidance.

Accenture lowered its earnings guidance for fiscal 2017. The company continues to expect net revenue to grow in the range of 5% to 8% in local currency. However, Accenture now expects earnings per share in the range of $5.64–$5.87 (previous guidance $5.75–$5.98). The Zacks Consensus Estimate is pegged at $5.88 per share.

For fiscal 2017, the company continues to expect operating margin to be in a range of 14.7% to 14.9%. Effective tax rate is also reiterated to be in a range of 22% to 24%. Accenture continues to expect operating cash flow in a range of $4.6 billion to $4.9 billion and free cash flow in a range of $4 billion to $4.3 billion.

Our Take

Accenture delivered mixed first-quarter fiscal 2016 results, wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. Moreover, the company lowered its fiscal 2017 earnings outlook and provided a dismal second quarter revenue guidance. However, both revenues and earnings increased on a year-over-year basis, reflecting increased focus on the Consulting and Outsourcing business, new bookings and continuous return of shareholders’ value.

Accenture’s solid performance across insurance, banking and health care segments reflects strong demand for its services, which will boost its long-term growth.

Notably, shares of Accenture have been steadily trending higher on a year-to-date basis. The stock generated a return of 18.8%, which outperformed the Zacks Consulting industry’s gain of 16.1%.

However, increasing competition from Cognizant Technology Solutions CTSH and International Business Machines Corporation IBM, a strained spending environment and Accenture’s broad European exposure may temper growth to some extent.

Share of Accenture were down approximately 3% in pre-market trading.

Accenture has a Zacks Rank #3 (Hold). Investors may consider Marvell Technology Group Ltd. MRVL, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Marvell has a long term-expected EPS growth rate of 12.33%.

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