Accenture Sees Recovery in H210: Time for Dip Buying

by: G. Subra

Earnings Summary

After market close on Oct 2nd 2009, Accenture (NYSE:ACN) reported F4Q09 revenues of $5.15B, at the higher end of company’s guidance of $5.0B to $5.2B and in line with consensus estimates of $5.14B. ACN reported EPS of $0.63 (not including the restructuring charge of $0.24), also in-line with the consensus estimate. For the FY09 company EPS grew by 3c from $2.65 to $2.68 (excluding restricting charge), despite revs falling by 8% in U.S. dollars YoY.

FY2010 Guidance

Accenture guided net revenue growth rate for FY2010 in the range of a 3% decline to a 1% increase Y/Y with operating profits at flat 13.4%.Accenture guided to a FY10 EPS of $2.64 to $2.72. Accenture expects the demand to pick up in 2H’FY10. It expects the operating margin to be 13.4% for FY2010. For Q1’FY10, Accenture guided revenues in the range of $5.3B to $5.5B, assuming a fx impact of 0% compared to Q1’FY09.

Bookings Summary

Accenture guided new bookings target in the range of $23B to $26B for FY2010. The company has seen an accelerating trend towards overall supplier consolidation within its client base but expects to maintain its market share and generate new bookings. It also saw stabilization in management consulting. In system integration, it continues to see healthy levels of deals. Within outsourcing, reduction in scope of the projects and requirements for quicker payback, have led to smaller deal sizes and increased use of its global delivery network.


Currently, ACN is trading at 16.6x multiple of its FY2009 GAAP earnings of $2.44. The average P/E for the past 5 years is 16.5 (based on Reuter’s estimates) while the sector P/E average is 14.8. Peers Cognizant Techology Solutions (NASDAQ:CTSH), Infosys (NASDAQ:INFY) have higher growth rate compared to ACN and hence trade at a higher multiple.

Despite the fact that ACN has a strong cash flow, good cash reserve and excellent operating margin, the stock is not cheap at the current level. As such, we would wait for a stock pull back before accumulating shares. ACN price target will be $40, based on a 15x multiple to its FY2010 earnings of $2.68.


1) Accenture reported Attrition of 10%, compared with 16% attrition in FY2008. Accenture also reported utilization of 86% compared with 83% in FYQ309. Lower attrition and higher utilization rates help margins and increase productivity.

2) Increased revenue from Financial Services: In FY2009, BFSI industry declined by 6% in revenue compared with FY2008. Accenture is involved in many M&A activities in U.S. and Europe. With stability and focus returning to the finance industry, Accenture sees some positive activity going on and expects the fruits of those labors to be savored in the 2nd Half of FY2010.

3) Operating margin targeted at 13.4%: In a tough year, Accenture has managed to achieve its highest operating margin since becoming a public company. It expects to maintain this operating margin in FY2010 and reinvest into the growth of the company.

4) Board approval to increase share repurchase authority by $4B to $4.9B and to increase the dividend by 50% to $0.75. This shows strong management initiative to create free cash flows and return cash to shareholders.


1) Unfavorable foreign exchange headwinds pressuring revenue and EPS.

2) Competition pressuring margins: Recent consolidation in Services industry Hewlett-Packard (NYSE:HPQ)/ Electronic Data Systems (NASDAQ:EDS), Xerox (NYSE:XRX)/Affiliated Computer Systems (ACS), Dell (DELL)/Perot Systems (NYSE:PER)) as well as Indian service providers move to enter high end consulting business through smart acquisitions in U.S. and Europe may negatively affect the margins.

3) Rising wages, increased expenses associated with the growth of ACN's global delivery network and expected flat revenues over FY2010 will add pressure to the operating margin.

Earnings review

Accenture reported FYQ409 revenues of $5.15B, declining 7% YoY in local currency and 14% in U.S. dollars. Consulting revenues for the quarter were $2.9 billion, a decrease of 19% in U.S. dollars and 12% in local currency. Outsourcing revenues were $2.2 billion, a decrease of 7% in U.S. dollars and an increase of 1% in local currency. The FYQ409 revenues have seen a negative 7% fx impact compared with to FYQ4’08. For FYQ1’10, Company doesn’t expect any fx headwind and for FY2010, it expects a 4% tail wind.

While Accenture continues to see market uncertainty, it has seen some positive activity in that customers have started to engage in meaningful dialogue about the potential projects in FY2010. Although the revenues have declined YoY, ACN maintained 4Q’09 operating margin to 13.1% and a FY09 operating margin of 13.4%. Including the restricting charge of 253M, the Q4’09 operating margin was 8.2%. The Q4’09 EPS excluding the restricting charge was $0.63, in line with the consensus estimate.

Revenue Segment review

Communication and high tech services generated $1.12B, a decrease of 15% in local currency. Declining only by 2%, Outsourcing contributed more to the revenue than Consulting which declined by 26%. This segment’s operating margin was 14%, improving by 200bp YoY.

Financial services generated $1.017B in revenue, a decrease of 10% in local currency. Consulting revenues declined by 12% while the outsourcing revenue declined by 8% in local currency. The company reported that the consulting environment remained fragile, but some signs of stability were seen and activity in Europe was picking up. Insurance industry remained strong. Within outsourcing, the slowdown that was seen was mainly due to contract cancellations. This segment saw a decline in operating margin by 100bp YoY from 13% to 12%.

Products generated $1.3B revenue, declining 10% YoY in local currency. Within consulting, the revenues declined by 22% in local currency. Outsourcing saw a good growth and it reflected the good demand for Application and infrastructure outsourcing. This segment saw a decline in operating margin of 100bp YoY from 14% to 13%.

Public service generated $776M in revenue, increasing 12% in local currency. Accenture continues to see Public and Health service as a growth area and is rolling out many programs. The revenue was driven by strong demand for system integration in U.S. and by the health & human services group. This service reported 14.5% operating margin, increasing 4% YoY.

Resources generated $943M, decreasing 3% in local currency. The management is seeing a pickup in activity after a decline in bookings in Q2/Q3. The group reported 16% operating margin, increasing 2% YoY.

Disclosures: No positions held