Accenture plc (ACN) reported second quarter fiscal 2012 earnings per share (EPS) of 97 cents, handily beating the Zacks Consensus Estimate of 86 cents. Earnings increased 28.8% from the year-ago quarter aided by higher revenues and margins, lower share count and tax rate as well as favorable foreign-exchange rates. Shares gained 1.79% in after-hour trade.
Revenues
Accenture reported second quarter net revenue of $6.8 billion (including a 1.0% negative foreign exchange impact), up 12.3% from $6.1 billion in the year-ago quarter. Net revenue was in line with the higher end of the company’s guided range of $6.5 billion to $6.8 billion and ahead of the Zacks Consensus Estimate of $6.7 billion. 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, Communications, Media & Technology, Product and Resources generated double-digit year-over-year growth, while Financial Services and Health & Public Services secured a high single-digit growth rate. Other revenues were strong with a 30.4% year-over-year increase.
Consulting and Outsourcing revenues increased 7.6% and 18.8% from the year-ago quarter to $3.8 billion and $3.0 billion, respectively.
Geographically, year-over-year increases of 13.2%, 8.0% and 23.4% were seen in top-line contributions from the Americas, Europe, the Middle East and Africa (EMEA) and the Asia Pacific, respectively. Accenture’s performance in the EMEA region amidst the prevailing debt concern was encouraging.
Bookings
Total new bookings for the second quarter were $7.94 billion, reflecting a negative 1% foreign-currency impact. Consulting bookings were $4.05 billion and outsourcing bookings were $3.89 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 second quarter gross margin dropped 60 basis points year over year to 31.1%. 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 14.0% in the year-ago quarter.
Total operating expenses grew 7.1% year over year due to increases of 8.8% in sales and marketing expenses and 4.3% 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 13.1% compared to 12.7% in the year-ago quarter.
Accenture reported a net income of $704.5 million or 97 cents a share, up from $557.6 million or 75 cents in the year-ago quarter. One-time items in the quarter were insignificant. The effective tax rate was 20.5%, as against 26.9% in the year-ago quarter. The lower effective tax rate was primarily due to higher benefits related to final determinations of tax liabilities for prior years, partially offset by increases in tax reserves.
Balance Sheet & Cash Flow
Operating cash flow was $857.8 million in the reported quarter compared to $475.3 million in the prior quarter. Net property and equipment additions were $85.4 million, up from $80.9 million in the prior quarter. Total cash balance increased to $5.5 billion from $5.1 billion in the preceding quarter. Accenture carries a total debt burden (long term plus short term) of $5.9 million, down from $6.4 million in the prior quarter.
Share Repurchase and Dividend
During the second quarter, Accenture repurchased 8.6 million of its common outstanding shares at a total value of $465.0 million. The activity includes 6.5 million shares repurchased in the open market. As of February 29, 2012, Accenture had roughly 705 million worth shares outstanding under the current authorization.
Accenture also declared a semi-annual cash dividend of 67.5 cents per share in the reported quarter. The dividends are payable in May 2012.
Guidance
For the third quarter of fiscal 2012, Accenture expects net revenue in the range of $7.05 billion to $7.25 billion, reflecting a strong sequential comparison. This figure was arrived at after considering a 3% negative foreign-exchange impact. The company did not provide any third quarter update on EPS, but our Zacks Consensus Estimate for earnings is pegged at $1.01.
For full fiscal 2012, management raised its previous expectations. Net revenue growth is projected in the range of 10.0% to 12.0%, up from the previous expectation of 7.0% to 10.0%. Expectation for new bookings has been skewed toward the higher end of the previously guided range of $28.0 billion to $31.0 billion. The company expects 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 $3.82 and $3.90, higher than prior expected range of $3.76-$3.84. However, the Zacks Consensus Estimate of $3.82 is in line with the lower end of the company’s guidance range, reflecting a possible upside.
Accenture also forecasts operating cash flow in the range of $3.65-$3.95 billion; property and equipment additions of roughly $450.0 million; and free cash flow in the range of $3.2 billion to $3.5 billion.
Recommendation
We find Accenture’s second quarter results decent, as the top and bottom lines beat the Zacks Consensus Estimates. We remain encouraged by the company’s resilience to tougher comparisons and a continued uncertain macro environment. Accenture seems to be in a growth momentum. This can be inferred from its commentary in the conference call in which it promised to continue investing in priority industries (such as Communications) and emerging markets as well as to boost its brand value.
Accenture’s deal prospects look bright. Moreover, the company’s endeavor to expand in Asia is also encouraging. With the west facing threats of a double-dip, all eyes are now turned toward Asia. With the continuous emergence of hi-tech innovations there, Accenture could ink deals in technology services, as well as outsourcing and consulting services.
We are encouraged by the steady flow of new business and believe that the trend will continue. However, increasing competition from International Business Machines Corp. (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 Buy recommendation, denoted by the Zacks #2 Rank.
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