Third Quarter Overview
Third quarter results were impressive, with earnings per share (EPS) of 73 cents substantially exceeding the Zacks Consensus Estimate of 69 cents.
Revenue of $5.57 billion was up 8.0% from $5.15 billion reported in the year-ago quarter. This was within the guided range provided by Accenture and attributable to revenue increases across all its operating segments. Product revenue, which increased 14.0% sequentially, was the primary contributor to the quarter’s performance. Geographically, the Asia Pacific and Europe Middle East and Africa (EMEA) regions reported increases in revenue, while the Americas tumbled year over year.
Accenture recorded consulting bookings of $3.18 billion and outsourcing bookings of $3.25 billion in the third quarter. On the whole, new bookings in the third quarter reached $6.43 billion. This apart, the operating results did not improve much, with the operating margin coming in flat. The margin was impacted by higher sales and marketing expense incurred for the implementation of the sales effectiveness model.
Out of the eighteen analysts providing estimates for the fourth quarter, two have revised estimates upward in the last thirty days, one of which was in the last seven days. There was no movement in the opposite direction. For fiscal year 2010, two analysts have raised estimates over the last thirty days, one fop which was in the last seven days.
Most of the upward revisions to estimates took place as a result of the good performance by the company during the third quarter and new bookings made by the company in the recently concluded quarter.
Other analysts believe that Europe will not impact Accenture’s results significantly, since there have been relatively positive comments regarding the demand situation in Europe from the company’s closest competitor Capgemini. Moreover, Accenture’s consulting capabilities help clients reduce cost. Hence, the products should remain attractive in a difficult market. A revival in demand for the company’s European business is also expected, driven by an improvement in client spending.
Some analysts believe large transformational IT projects are not very frequent. These analysts feel that Accenture is benefiting from the rebound in smaller engagements and that the company needs to win larger deals to increase its revenue base. Analysts also expect offshore deals to increase this year, spurred by gradual improvement in spending. Subsequently, Accenture might generate value for its shareholders by generating business volume through offshore deals.
Magnitude of Estimate Revisions
Since there weren’t too many estimate revisions, there was no impact on the Zacks Consensus Estimate for the fourth quarter and fiscal 2010, although for fiscal 2011, estimates moved down by 3 cents to $2.90 over the last 90 days.
Despite favorable trends noticed in Accenture’s businesses, new business wins and improvement in new bookings, we remain cautious until revenue growth shows more sustained momentum.
We maintain our short-term Hold (Zacks Rank #3) recommendation.