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Accenture Beats Despite Euro Crisis - Analyst Blog

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Accenture plc ( ACN ) reported first quarter fiscal 2011 earnings per share ( EPS ) of 96 cents, marginally beating the Zacks Consensus Estimate of 94 cents. Earnings increased 19.6% from the year-ago quarter aided by higher revenues and margins, lower share count and tax rate as well as favorable foreign-exchange rates. Despite the outperformance, shares dropped 2.55% in after-hour trade, probably due to investor concern over Accenture's huge reliance on the European market. A weak sequential guidance may have also taken a toll on the share price, in our belief.

Revenues

Accenture reported first quarter net revenue of $7.07 billion, up 17.0% from $6.04 billion in the year-ago quarter. Net revenue was roughly in line with the higher end of the company's guided range of $6.8 billion to $7.0 billion. The results included a 3.0% positive impact from foreign currency. The meaningful growth in net revenue may be attributed to the significant increase in revenues across Accenture's operating segments and healthy demand for its offerings across the industries served.

Among the operating segments, both Communications & High Tech and Product were at the top with 20.0% year over year growth, while Resources was in the second position with an 18.0% growth rate. Financial Services and Health & Public Services revenues followed with 14.0% and 13.0% growth, respectively. Other revenues remained flat year over year.

Consulting and Outsourcing revenues increased 14.0% and 21.0% from the last year to $4.1 billion and $3.0 billion, respectively.

Geographically, year-over-year increases of 17.0%, 14.0% and 28.0% were seen in top-line contributions from the Americas, Europe Middle East and Africa (EMEA) and the Asia Pacific, respectively.

Bookings

Total new bookings for the first quarter were $7.8 billion, reflecting a positive 3% foreign-currency impact. Consulting bookings were $4.2 billion and outsourcing bookings were $3.6 billion. According to management, bookings growth was attributable to greater demand for Accenture's services as well as improved sales and marketing efforts.

Operating Results

The first quarter gross margin dropped 40 basis points year over year to 31.8%. The utilization rate was 87.0%. The decrease in gross margin was due to higher subcontractor costs, recruiting and training costs as well as an increase in annual compensation. The attrition rate fell to 12.0% from 15.0% in the year-ago quarter.

Total operating expenses grew 13.7% year over year due to increases of 14.5% in sales and marketing expenses and 12.1% in general and administrative expenses. However, as a percentage of net revenue, operating expenses were lower than the year-ago quarter. The operating margin was 13.9% compared to 13.7% in the year-ago quarter.

Accenture reported net income of $704.0 million or 96 cents a share, up from $599.3 million or 81 cents in the year-ago quarter. One-time items in the quarter were insignificant. The effective tax rate was flat year over year at 28.3%.

Balance Sheet & Cash Flow

Operating cash flow was $475.3 million in the reported quarter compared to $1.38 billion in the prior quarter. Net property and equipment additions were $80.9 million, up from $137.0 million in the prior quarter. Total cash balance as of November 30, 2011 decreased to $5.1 billion from $5.7 billion in the preceding quarter. Accenture carries a total debt burden (long term plus short term) of $6.4 million, up from $4.4 million in the prior quarter.

Share Repurchase and Dividend

During the first quarter, Accenture repurchased 5.3 million of its common outstanding shares at a total value of $285.0 million. The activity includes 3.4 million shares repurchased in the open market. As of November 30, 2011, Accenture had roughly 706 million shares outstanding under the current authorization.

Accenture also paid a semi-annual cash dividend of 67.5 cents per share in the reported quarter.

Guidance

For the second quarter of fiscal 2012, Accenture expects net revenue in the range of $6.5 billion to $6.8 billion, reflecting a weak sequential comparison. This figure was arrived at after considering a 1% negative foreign-exchange impact. The company did not provide any second quarter update on EPS, but our Zacks Consensus Estimate for earnings is pegged at 86 cents.

For full fiscal 2012, overall, management maintained its previous expectations but for EPS. Net revenue growth is projected in the range of 7.0% to 10.0%. Expectations for new bookings are in the range of $28.0 billion to $31.0 billion. The company expects its operating margin in the range of 13.7% to 13.9% and the annual tax rate between 27.0% and 28.0%. Diluted EPS expectation is between $3.76 and $3.84, lower than prior expected range of $3.80-$3.88. The earnings guidance is above the Zacks Consensus Estimate of $3.83.

Accenture also forecasts operating cash flow in the range of $3.6-$3.9 billion; property and equipment additions of roughly $490.0 million; and free cash flow in the range of $3.1 billion to $3.4 billion.

Recommendation

We find Accenture's first quarter results decent, as the bottom line modestly beat the Zacks Consensus Estimate. We remain encouraged by the company's resilience to tougher comparisons and a continued uncertain macro environment. However, the global economic crisis could be somewhat felt in its weak sequential revenue expectation as well as lowered fiscal EPS expectation.

Accenture seems to be in a growth momentum. This can be inferred from its commentary in the conference call in which it mentioned that the company will continue to invest in priority industries (such as Communications) and emerging markets as well as boost its brand value. We believe the company's confidence in taking such decisions amidst global concerns is powered by its five consecutive quarters of outperformance.

We are encouraged by the steady flow of new business and believe that the trend will continue. However, increasing competition from International Business MachinesInc. ( IBM ), a strained spending environment and Accenture's broad European exposure may temper its growth prospects to some extent.

Currently, Accenture has a short-term Sell recommendation, denoted by the Zacks #4 Rank.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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