Taking Stock: Accenture Earnings Offer Spending Hope - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

IoT
IoT
Business & Finance
Commentary
4/2/2004
01:35 PM
William Schaff
William Schaff
Commentary
50%
50%

Taking Stock: Accenture Earnings Offer Spending Hope

Profitability of large outsourcing contracts depends on execution

I'm waiting with dread for the surge of earnings reports that will be coming shortly. I prefer weeks before the end of the quarter when just one or two companies report. It lets me digest the information and see if it makes sense. One of the leading IT service and consulting companies, Accenture, reported its fiscal second quarter 2004, ending in February. It gives reason to believe that IT spending may be picking up. I hope so.

The company reported quarterly revenue of $3.3 billion, up 17% year over year in U.S. dollars but up only 8% in constant currency. Consulting revenue was $2.0 billion, 61% of total revenue, up from 57% last year. Outsourcing, including business-process outsourcing, was most of the balance at $1.2 billion. Consulting revenue, though up 5% year over year, was actually down 5% in constant currency. Outsourcing grew 46% year over year and 37% in constant currency. Unfortunately, consulting revenue is a higher-margin business, so the overall mix is pushing down gross margin. The best part of Accenture's service-business revenue mix is that it's diversified among many business segments (communications and technology, financial services, government, resources, and products), as well as geography (48% in Europe, the Middle East, and Africa; 45% Americas; 7% Asia-Pacific).

In addition, Accenture had new bookings of $7.7 billion, a company record. Consulting bookings were $2.9 billion, and outsourcing was $4.8 billion, up 20% and 100%, respectively, year over year. This should allow for very predictable future cash flow and earnings growth, in my view.

Despite the quality of the company, there are some obvious business risks. The most glaring near-term risk is that Accenture is looking for a new CEO now that Joe Forehand is retiring. A successor is expected to be named in April.

The pricing environment is tough in IT services. There continues to be pressure not only from domestic service providers but also offshore outsourcers. In addition, the profitability of many large outsourcing contracts depends greatly on execution since they have performance-based fees. Just ask EDS about its U.S. Navy contract. If that wasn't bad enough, currency fluctuations will continue to have a big influence on short-term revenue and earnings. Therefore, quarterly profits might become a lot more volatile.

Accenture forecasts third-quarter revenue of $3.4 billion to $3.6 billion and earnings per share of 30 cents. I project that revenue is likely to be at the high end, and the company's forecasted EPS is probably on the low side. For fiscal year 2004, revenue growth is projected to be 11% to 14%, with EPS of $1.13 to $1.15. Analysts' consensus EPS forecast is still at $1.12 for 2004 and $1.26 for fiscal year 2005. Both numbers will move higher after this quarter's report, in my view. At the current share price of $24.45, this is 19.4 times 2005 EPS. Historically, Accenture has traded 12 to 30 times EPS. The mean multiple has been around 18 to 19 times. The company generates a lot of free cash flow after expenses. I estimate that free cash flow for 2004 will be $1.3 billion to $1.4 billion. Using our discounted cash-flow model also would result in a valuation of around $25 to $26 per share, which seems reasonable. Given where most technology stocks are priced today, this seems like a deal.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
2020 State of DevOps Report
2020 State of DevOps Report
Download this report today to learn more about the key tools and technologies being utilized, and how organizations deal with the cultural and process changes that DevOps brings. The report also examines the barriers organizations face, as well as the rewards from DevOps including faster application delivery, higher quality products, and quicker recovery from errors in production.
News
How COVID is Changing Technology Futures
Jessica Davis, Senior Editor, Enterprise Apps,  7/23/2020
Slideshows
10 Ways AI Is Transforming Enterprise Software
Cynthia Harvey, Freelance Journalist, InformationWeek,  7/13/2020
Commentary
IT Career Paths You May Not Have Considered
Lisa Morgan, Freelance Writer,  6/30/2020
Register for InformationWeek Newsletters
Video
Current Issue
Special Report: Why Performance Testing is Crucial Today
This special report will help enterprises determine what they should expect from performance testing solutions and how to put them to work most efficiently. Get it today!
White Papers
Slideshows
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Sponsored Video
Flash Poll