Accenture: Long-Term Growth Intact But FY09 Bookings Guidance Vulnerable

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 |  Includes: ACN, CSC, EDS, IBM
by: The Manual of Ideas

Accenture (NYSE:ACN) is a global leader in helping businesses improve processes and maximize return on their technology investments. At the current valuation, Accenture shares should yield a long-term return that meaningfully exceeds long-term growth in technology capex by global enterprises. However, management’s guidance regarding FY09 bookings and EBIT margin appears quite vulnerable to continued macroeconomic deterioration.

BUSINESS OVERVIEW

Accenture is a global management consulting, IT services and outsourcing company. It has 186,000 employees in 49 countries and operates in five segments: communications and high tech, financial services, government, products, and resources. Outsourcing contracts (40% of revenue) typically have longer terms than consulting contracts (60% of revenue) and generally have lower gross margins than consulting.

SELECTED OPERATING DATA

FYE August 31

2006
2007
2008
2009E1

% of net revenue by type of work:

Consulting
59%
60%
60%
--
Outsourcing
41%
40%
40%
--

% of net revenue by operating group:

Communications & tech

25%
23%
23%
--

Financial services

21%
22%
21%
--
Products
24%
25%
26%
--

Public service

13%
13%
12%
--
Resources
16%
16%
17%
--

Net revenue growth by operating group (constant currency basis):

Communications & tech

6%
5%
10%
--

Financial services

7%
16%
6%
--
Products
15%
18%
17%
--

Public service

4%
12%
7%
--
Resources
12%
17%
14%
--
D net revenue
9%
13%
11%
9-12%

% of net revenue by geography:

Americas
47%
43%
42%
--
EMEA
46%
48%
49%
--
Asia Pacific
8%
9%
9%
--

EBIT margin by operating group:

Communications & tech

15.1%
12.6%
12.1%
--

Financial services

10.9%
11.3%
13.2%
--
Products
10.0%
13.6%
14.2%
--

Public service

3.8%
10.6%
9.1%
--
Resources
12.7%
14.8%
14.4%
--
Total EBIT margin
11.1%
12.7%
12.9%
13-13.3%
Other financial data:

New bookings ($bn)

20.4
22.0
26.8
26.0-28.0

Net revenue ($bn)

16.6
19.7
23.4
--
FCF ($bn)
2.4
2.3
2.5
2.6-2.8

Effective tax rate

26%
34%
29%
30-32%

Diluted EPS growth

2%
24%
35%
8-11%
Other operating metrics:
Utilization
na
85%
84%
--
Attrition
18%
18%
16%
--
Click to enlarge

1Reflects management guidance provided on September 25, 2008.

INVESTMENT HIGHLIGHTS

  • Top global technology-focused consulting firm. Accenture has one of the broadest service offerings in the industry. Competitors include IBM Global Services (NYSE:IBM), EDS, and Computer Sciences Corp. (NYSE:CSC).
  • Management expressed “continued confidence” in the business following strong FQ4 results. While CEO Green noted “uncertainty in the economic environment,” he expressed confidence that revenue and income would increase in FY09.
  • Guiding for revenue growth of 9-12% (constant currency) and EPS growth of 8-11% in FY09. The company expects new bookings of $26-29 billion in FY09, compared to $26.8 in FY08. EBIT margin is expected to expand by 10-40 bps in FY09, and management forecasts FCF of $2.6-2.8 billion.
  • Strong balance sheet; share buybacks. Accenture had $3.6 billion of net cash as of August 31, having repurchased 61 million shares for $2.3 billion in FY08 (another $2.5 billion remains authorized). The company paid an annual dividend of $0.50 per share in November, up from $0.42 per share a year earlier.
  • Share price implies 12% trailing FCF yield, 11x trailing P/E and 10x forward P/E.

INVESTMENT RISKS & CONCERNS

  • Dependent on technology and related services spending by enterprises, with 21% of FY08 revenue from the financial services sector. The company is vulnerable to a global recession, as EMEA and Asia Pacific contribute 58% of revenue.
  • Majority of revenue derived on project-by-project basis, with many consulting engagements less than 12 months in duration. Backlog is typically a small portion of expected annual revenue.
  • People business with fairly low barriers to entry. While Accenture has scale advantages, particularly in outsourcing, IT and management consulting is subject to constant entry by new competitors. The company had a 16% attrition rate in FY08.

COMPARABLE PUBLIC COMPANY ANALYSIS

($mn)
MV
EV
EV/Rev
P/TB
08 P/E
09 P/E
BE
13
703
.2x
n/m
n/m
n/m
CSC
4,322
7,354
.4x
7.7x
7x
6x
DTPI
101
54
.3x
1.4x
57x
33x
IBM
107,920
132,577
1.3x
19.2x
9x
9x
ACN
20,919
17,304
.7x
12.3x
10x
9x
Click to enlarge

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