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IT SERVICES

Analysis of Accenture’s Fiscal Year 2003 Business Results

Strong Finish

Fiscal Year Ends with a Bang: Outsourcing, New Contracts Surge

PHOENIX, September 18Accenture Ltd. CFO Harry You said on Wednesday the “market environment” for consulting and technology services has improved.  

Speaking via webcast from the SG Cowen technology conference in Boston, You said that “our clients are healthier” and “they've now experienced some robust recoveries,” according to a Dow Jones Newswire report.  You added that he expected technology services firms like Accenture to lead a recovery in the broader tech sector.

The Wednesday was September 3.  The following day, Accenture’s share set a new 12-month record of $23.92, lifting the company’s market cap by about $1 billion in just one day. 

Two weeks later, on another Wednesday (Sep 17), we learned the reasons behind Accenture CFO’s optimism.  His company ended its fiscal year 2003 (Aug 31) with a bang.  Make it a big bang, especially considering some of its competitors’ recent woes. 

Fourth (fiscal) quarter revenues were up 12% (up 5% in local currency), led by a 41% surge in outsourcing and a 35% jump in government sector business.  Earnings per share surged more than three-fold (from $0.08 a year ago, to $0.25), exceeding Wall Street’s expectations.  New contract sales increased by 34% to $3.8 billion, lifting the fiscal year total to $16.1 billion. 

Last but not least, Accenture’s free cash flow was about $1.3 billion, while its debt was a negligible $60 million.

(All these figures are based on preliminary results.  The actual fourth quarter figures will be released October 9).

So you’d think that Accenture’s shares would be up on the news?  Think again.  The stock dropped yesterday more than 3% to close at $22.60, still near its annual high, but no cigar this time.

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Guess Wall Street traders were too preoccupied with its (now former) stock exchange chairman’s compensation woes, and with other economic distractions to give credit where credit was due.  Some also attributed the drop in Accenture’s stock price to the fact that the company’s “operating margin isn't expanding quite as freely as we had hoped,” according to a Reuters Sep 17 report.

Operating margins for the fourth quarter are expected to be about 11.6%, while the comparable full fiscal year margins should come in at about 13.1%, according to Accenture’s release.

Either way, a double digit operating margin is something to cheer, not condemn, particularly for a company that’s also growing in double digits.  And considering the surge in the typically lower-margin outsourcing business that is gaining share of Accenture’s total revenues and profits.

For the full fiscal year 2004, Accenture’s revenues were up 2% (down 4% in local currency), while its earnings per share nearly doubled, from $0.56 last year to $1.05 in the latest period.

Vertical Segments

The government sector’s growth continued to outpace that of all other Accenture industry segments.  A 35% increase in this vertical sector’s fourth quarter contributed to a 20% surge for the year.  Government business now represents about $1.6 billion or 13% of the company’s revenues, more than double its share only three years ago.

Although the resources segment declined by 2% for the year, it was the second-fastest growing industry in the fourth quarter (up 17%).  At about $2 billion in revenues, this business segment maintained its 17% share of the company’s global business in FY03.

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Accenture’s products segment (automotive, consumer, pharmaceuticals, retail), which at $2.6 billion of revenues accounted for about 22% of the company’s business in FY2003, also grew by 9% in the fourth quarter, while declining by 3% for the year.

Perhaps the most encouraging industry news, however, was that Accenture’s largest segment – communications & high-tech – which accounts for $3.3 billion or 27% of its total revenues, grew both in the fourth quarter (by 6%) and for the year (by 3%). 

Finally, the financial services segment checked in with a 7% jump in the fourth quarter, and a flat annual revenue performance (at $2.4 billion or 20% of total).

Geographic Segments

Helped by the weakness in the U.S. dollar, Europe was by far Accenture’s best geographic region.  Revenues from Europe, Middle East and Africa jumped by 20% to $1.33 billion in the fourth quarter (up 3% in local currency).  

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For the full fiscal year 2003, revenues from Europe increased by 8% (down 6% in local currency).  It was the first time ever that European revenues surpassed those from the U.S. market ($5.35 billion vs. $5.28 billion – our estimate). 

Americas region’s revenues rose by 6% in the fourth quarter, while declining by 3% for the full year. 

Accenture’s revenues in Asia/Pacific were up 8% in the fourth quarter, and up 2% for the full fiscal year.

Horizontal Segments

As noted earlier, outsourcing grew by 41% in the fourth quarter, and by 35% for the year.  As a result, this horizontal segment now represents $3.6 billion or 30% of Accenture’s total revenues. 

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By contrast, consulting activities, once the mainstay of this IT services firm, continued to shrink.  Revenues were down 10% for the full year to $7.9 billion, or 70% of the total.  Yet even in this declining segment, one could see signs of improvement.  Revenues were flat in the fourth quarter.

Outlook

Speaking at a New York conference with analysts on Wednesday (Sep 17), Accenture executives said they expected the company to grow between 5% and 10% in the next (2004) fiscal year.  They expected the free cash flow to be in the $1.3 to $1.5 billion range.  New contract signings are supposed to come between $16 billion and $18 billion. 

There is one adjective that seems to befit such a forecast: upbeat!  It was an upbeat outlook by upbeat-sounding executives.  Their prophecy should bode well not just for their company, but also for others in the global IT services market. 

If only more Wall Street traders were paying attention… Maybe the next time? (Oct 9).

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2002: Light at End of Tunnel (July 17, 2003), Boom Amid Gloom and Doom (Oct 10, 2002)Analysis of Accenture's 2001/1Q02 Results (Jan 11, 2002)Analysis of Stock Market Reaction to WTC (Sep 26, 2001)Annex Research’s Analysis of Accenture's 2000 results (Apr 11, 2001)

Last three Heptathlons: Annex Research IT Services Heptathlon 2002 (May 21, 2002)IT Services Heptathlon 2000 (May 11, 2001)1999 IT Services Heptathlon (Apr 17, 2000)

2003 (IBM): “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17).

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Volume XIX, No. 2003-16
September 18, 2003

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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