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Updated 4/08/04, 5:25 p.m. PDT (adds "Green Gets Green Light")

Analysis of Accenture's Second Quarter Fiscal 2004 Business Results

Burning the Track Again

Accenture Returns to Double-digit Growth, Sets New Contract Sales Records; Cash Flow Soars

PHOENIX, Mar 30 - Accenture stormed back to double-digit growth today, burning the track with all of its business segments' results during the second quarter (ended Feb 29) of its fiscal year 2004.  The company also shattered its quarterly sales record with all-time new contract signings of $7.7 billion.

For the first time since the company went public in 2001, ALL of Accenture's industry segments reported double-digit growth.  As with all major IT services vendors in these days of a global war economy, Accenture's government business grew the fastest, surging by 29% in the latest quarter.  For the full year, we expect it to increase by 33%.

The total second quarter revenues jumped by 17% to $3.3 billion.  For the full fiscal year 2004, which ends Aug 31, we expect Accenture to grow its business by 13%, to about $13.4 billion.

The quarterly new contract sales record of $7.7 billion was actually a double whammy.  Both consulting and outsourcing operations were up sequentially from the first quarter.  Consulting grew by 40% - from $2.1 billion to $2.9 billion, while outsourcing surged by 60% - from $3.0 billion to $4.8 billion.  

Obviously, this bodes well for Accenture's revenue growth in the future.  What's especially significant is that consulting, its biggest segment (about 61% of revenues), is now returning to growth after several years of stagnation or contraction.

So you'd think the stock market would applaud the results?  Well, it did, for a change, but ever so tepidly.  The company's stock was up in morning trading today by just over 1%.

Such a reaction to stellar business results was even less understandable if one considers Accenture's improved profitability and cash flow.  For the first six months of the fiscal year 2004, the company's net profit surged by 21% to $297 million.  And the outlook for the second half is even better.

Great Cash Flow Performance

As for cash flow, perhaps the best measure of the soundness of an IT services firm's operations, Accenture had a free cash flow of $885 million during the first six months of fiscal 2004, up 66% over the corresponding period a year ago ($533 million).  For the full year 2004, the company expects its free cash flow to be in the range of $1.3 to $1.5 billion.

Just to put things into perspective, IBM's 2003 cash flow was $1.7 billion.  Two thousand and three was a very good year for IBM.  IBM's cash flow the year before was a negative $400 million.  IBM is an $89 billion-company.  Accenture is a $12 billion company (as of 2003).  IBM is a cash-consuming business.  Accenture is a cash-generating machine. 

And now, keeping all that in mind, consider the following stock market indices.  IBM's (trailing) price/earnings ratio is 21.2.  Accenture's is 21.8, i.e., virtually the same.  Even the lowly EDS has a forward P/E of 20!?

Does that make any sense?  If it does, maybe you can also explain wasting money is better than making money?  We can't...

By the way, we did not mean to single out IBM for this kind of a comparison.  None of the top IT services competitors come even close to Accenture when it comes to generating cash.  Some are downright burning it (see EDS: "Hot Air Jordan" Flaunts Flop as Feat, Feb 2004). We merely picked IBM because of its awesome size - to illustrate that one must never confuse quantity (IBM) with quality (ACN).

U.S. Returns to Growth

Perhaps the most encouraging news for Accenture shareholders who still pay attention to business fundamentals instead of the Wall Street Casino vagaries, is that the company's U.S. business is once again building up steam.  

In the second quarter, Accenture's biggest geographic unit - the Americas region, which accounts for about half of the company's revenues - jumped by 12%, its first double-digit growth in years (9% in constant currency).  Europe and Asia/Pacific reported even higher double-digit growth (up 22% and 18% respectively), but their increases were more heavily aided by the weak U.S. dollar and the currency translations.  Without the foreign exchange boost, Europe and Asia/Pacific would have risen by 7% and 6% respectively.

Outsourcing Surges 47%

One reason that Accenture has returned to double-digit growth is its success in growing the outsourcing business.  In the second quarter, outsourcing surged by 46% to $1.28 billion, continuing its rapid expansion in the last three years.  But just as good a news to Accenture shareholders was that its consulting business, which still represents about 61% of total revenues, also grew (up 4%), after several years of stagnation or declines.

As a result, we expect outsourcing to end up at $5.3 billion by the end of the fiscal year 2004, a 47% jump from the year before.  Consulting revenues will also rise, although more modestly (up 2% - see the chart).


Logical thinkers may have already concluded what the outlook for Accenture is: Blue skies are ahead once again.  Indeed.  The company seems to be firing on all cylinders and is burning the track while some of its major rivals are wasting time figuring out where to get cheaper spare parts for their sputtering engines.  For our detailed forecast, click here to view the table.

Well, isn't that a splendid time for the CEO of such a fine-tuned enterprise to... well, step down?  No kidding!  Accenture also announced this morning that its CEO, Joe Forehand, will vacate this position on September 1, making room for a new CEO who is to be named probably next month

Talk about leaving on a high note, huh?  That's another point of distinction between Accenture and IBM leaders.  One had class; the other crass (see "Gerstner's Legacy," Jan 2002; Gerstner: The Untold Story, Dec 27, 2002); The Book: Gerstner Spills the Beans, Dec 13, 2002).

Happy bargain hunting!

Bob Djurdjevic

Green Gets Green Light

PHOENIX, April 8 - Accenture's chief operating officer - client services, Bill Green, 50, got the green light today from the company's Board to succeed Joe Forehand as CEO on September 1.

Mr. Green "has overwhelming support among the partners, who as senior executives of the company with direct operational responsibility for the business, have unique insight into the requirements for Accenture's CEO," said the Board's lead director, Sir Mark Moody-Stuart, in a release.  

"Bill's contributions as a member of Accenture's senior management team, his work on our transition from a global partnership to corporate form and through our IPO (in 2001), and his experience across all of Accenture's businesses give him unique insight into running our company," Joe Forehand voiced his support for his successor.

Just as important winning support from the Board and his predecessor, Green seems to have also received a green light from the market.  On the day the Dow Jones Industrials average was down 38 points, the Accenture stock rose 0.4% to $25.24.

Green is a 26-year Accenture veteran who has cut his teeth in the company's Communications & High Tech operating group (from 1999 to 2003), Resources (1997-1999) and Manufacturing (1994-1997).  Prior to that, he was the managing partner of Accenture's New England consulting practice.

Based in Boston, Green joined Accenture in 1977, and became a partner in 1986.  He attended Dean College and holds a bachelor of science degree in economics, and a master of business administration degree from Babson College.  

For additional Annex Research reports, check out... 

2004 IT: Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Accenture: "Strong Finish" (Sep 2003); 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)

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Newsflash 2004-08
March 30, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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