Accenture plc (ACN) reported third quarter 2010 EPS of 73 cents, substantially exceeding the Zacks Consensus Estimate of 69 cents.
Revenue
Accenture reported third quarter 2010 total revenue of $5.57 billion, up 8.0% from $5.15 billion a year ago. This was within the company’s guided range and included a five percentage point positive impact from foreign currency. The meaningful growth in revenue may be attributed to the increase in revenue across all its operating segments.
Accenture saw revenue growth across all its operating groups, with Product revenue improving the most by 14.0% on a year-over-year basis. Communications & High Tech revenue grew 2.0%, while Financial Services revenue was up 12.0% year over year. Health & Public services revenue was up 3.0%. Resources revenue was down 11.0% from the year-ago quarter.
Geographically, the Americas reported an 11.0% decline in revenue compared to the year-ago quarter, Europe, Middle East and Africa (EMEA) reported a 4.0% increase in revenue, and the Asia Pacific region reported a 16.0% increase in revenue from last year.
Bookings
Consulting bookings were 3.18 billion. Outsourcing bookings were $3.25 billion. On the whole, new bookings for the second quarter were $6.43 billion and reflect a positive 5.0% foreign-currency impact when compared to new bookings in the second quarter last year.
Operating Results
Operating margin stayed flat at around 14.4%, despite the 8% increase in revenue, mainly due to the 260 bp increase in sales and marketing expenses (as a percentage of sales). The increase in selling expenses was due to the implementation of the sales effectiveness model put in place at the start of this fiscal year. The additional 40 basis point increase in sales and marketing expenses was due to Accenture’s sales pipeline building initiatives.
The third quarter gross margin was 34.7%, compared to 32.5% for the third quarter last year. This 220 basis point improvement from the year-ago quarter was completely offset by the increase in sales and marketing expense.
The company reported net income of $563.5 million (or $0.73 per share), down from $536.5 million (or $0.68 per share) in the year-ago quarter. The company witnessed an effective tax rate of 29.8% compared with 28.2% in the year-ago quarter. The lower tax rate recorded in the prior year quarter was the result of higher benefits related to final computation of tax liabilities.
Balance sheet & Cash Flow
Operating cash flow for the quarter was $961.0 million and net of property and equipment additions of $58.0 million. For the same period last year, operating cash flow was $1015.0 million, while net property additions were $44.0 million. Day services outstanding (DSO) were 28 days, down from 30 days last quarter. Total cash balance for the company in May 31, 2010 was $4.31 billion, versus $4.54 billion in the previous quarter.
Guidance
For the fourth quarter of fiscal 2010, the company expects net revenues in the range of $5.15 billion to $5.35 billion. This figure was arrived at after taking into consideration a 5% negative foreign-exchange impact, compared to the year-ago quarter.
For full fiscal year 2010, management expects net revenue growth in the range of negative 3.0% to positive 1.0%. The company now expects diluted EPS for the full fiscal year to be in the lower half of its previously guided range of $2.61 to $2.69. Apart from this, the company also expects new bookings for the full fiscal year to be toward the middle of its previously-guided range of $23.0 billion to $26.0 billion.
Recommendation
We believe that the recent economic turmoil could rationalize the growth prospects of the company to a certain extent. So despite improving trends noticed in Accenture’s businesses, and new business wins and tech spending showing an upward move in 2010, we remain cautious until revenue growth shows more sustained momentum.
We maintain our short-term Hold recommendation.
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