Accenture plc (ACN) reported third-quarter fiscal 2014 earnings per share of $1.26, which beat the Zacks Consensus Estimate of $1.21. On a year-over-year basis earnings increased 10.5% from $1.14 (excluding a benefit of 7 cents from the reduction in reorganization liabilities). The year-over-year increase was attributed to higher revenues and lower share count.
Revenues and Bookings
Accenture’s third-quarter net revenue not only increased 7.5% on a year-over-year basis to $7.74 billion but also surpassed the Zacks Consensus Estimate of $7.54 billion. Net revenue also surpassed management’s guided range of $7.40 to $7.65 billion, primarily aided by a 10% increase in Outsourcing revenues ($3.65 billion) and 6% increase in Consulting revenues ($4.09 billion).
Among the operating segments, Health & Public Services revenues increased 10.0% from the year-ago quarter to $1.31 billion while revenues from Financial Services were up 7.0% from the year-ago quarter to $1.68 billion.
Accenture’s revenues from Products of $1.91 billion increased 11.0% and revenues from Resources increased 2.0% from the year-ago quarter to $1.30 billion. Communications, Media & Technology revenues also increased 7% on a year-over-year basis to reach $1.52 billion.
Geographically, revenues from the Americas, and Europe, the Middle East and Africa (EMEA) increased 6.0% and 13%, respectively, while revenues from the Asia Pacific region declined 1.0% from the year-ago quarter.
Accenture reported new bookings of $8.8 billion during the quarter, which remained flat year over year primarily due to foreign currency fluctuations. Consulting bookings and Outsourcing bookings for the quarter amounted to $4.3 billion and $4.5 billion, respectively.
Operating Results
Third-quarter gross margin decreased 110 basis points (bps) from the year-ago quarter to 32.8%, primarily due to higher cost of services.
Operating expenses increased 4.7% from the year-ago quarter to $1.36 million, primarily due to the absence of reorganization benefit that aided year-ago quarter results. As a percentage of net revenue, operating expenses contracted 50 bps to 17.5% from the year-ago quarter.
Accenture’s operating income came in at $1.18 billion or 15.2% of net revenue which increased from $1.09 billion or 15.2% of revenues (excluding reorganization benefit) reported in the year-ago quarter. Accenture reported $868.8 million in net income or $1.26 per share.
Balance Sheet & Cash Flow
Accenture exited the quarter with total cash balance of $4.05 billion versus $3.68 billion in the preceding quarter. Accenture’s long-term debt balance at the end of the third quarter was $26.5 million.
Operating cash flow was $1.36 billion in the reported quarter while free cash flow was $1.28 billion.
Share Repurchase and Dividend
In keeping with Accenture’s policy of returning cash to shareholders, the company repurchased 5.5 million shares for $441.0 million during the third quarter. The activity included 4.8 million shares repurchased in the open market. During the reported quarter, Accenture paid dividends amounting to $624.7 million.
Guidance
For the fourth quarter of 2014, Accenture expects net revenue between $7.45 billion and $7.70 billion. The Zacks Consensus Estimate is pegged at $7.58 billion. The company did not provide any earnings per share guidance.
Accenture modified its guidance for fiscal 2014. The company expects net revenue to grow in the range of 4.0% to 5.0% (prior guidance range 3.0–6.0% growth) in local currency. Accenture expects its earnings per share in the range of $4.50-$4.54 compared with its earlier guided range of $4.50-$4.62. The Zacks Consensus Estimate is pegged at $4.54 per share .The company expects new bookings at the higher-end of the guided range of $33 -$36 billion.
For fiscal 2014, the company expects its operating margin to be 14.3%. Operating cash flow is expected in the range of $3.3-$3.6 billion, while free cash flow is likely to be within $2.9-$3.2 billion.
Recommendation
Accenture delivered solid third-quarter results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate. Revenues also increased on a year-over year basis reflecting an increased focus on the Outsourcing business, new bookings and continuous return of shareholders value. Moreover, the company provided a modest guidance. Another encouraging factor witnessed was the revenue increase in its Consulting business.
Accenture’s solid performance across insurance, banking and healthcare segments reflects strong demand for Accenture’s services, boosting long-term growth prospects. However, increasing competition from Cognizant Technology Solutions (CTSH) and International Business Machines (IBM), a strained spending environment and Accenture’s broad European exposure may temper its growth prospects to some extent.
Currently, Accenture has a Zacks Rank #3 (Hold). Investors may also consider Micron Technology (MU) with a Zacks Rank #2 (Buy).
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