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A SPECIAL ANNEX NEWSFLASH

Analysis of Accenture's Third Quarter Fiscal 2004 Business Results

Revving Up a Notch

Accenture Sets New Revenue, Profit Records

PHOENIX, June 17 - After the company released its second quarter fiscal 2004 results in late March, we noted that Accenture was burning the track again.  Well, Accenture has just revved up its growth engine a notch, setting new revenue and profit records in its third quarter.

The release of the third quarter results came this morning in the form of "preliminary" figures. The disclosure was made earlier than expected (the full third quarter release is scheduled for July 7), as is usually the case with Accenture when the actual figures either underperform or exceed the company guidance by a certain margin.

And exceed expectations is exactly what Accenture did.  The company expects to earn 37 cents a share on revenues of $3.69 billion in the third quarter.  Wall Street analysts surveyed by Thomson First Call were forecasting earnings of 31 cents a share on revenue of $3.48 billion.

"It's the highest quarterly revenue in the company's history," said Harry You, Accenture's CFO, during the early morning analyst call.  

The third quarter was also the most profitable quarter in Accenture's history.  Its operating profit is expected to be $573 million, or 15.5% of revenues, compared to $404 million, or 13.3% of revenues, for the third quarter last year, a 42% increase.

This quarter marks a "true beginning of prosperous times" for Accenture partners, investors and employees, You added.

No wonder the stock surged more than 5% in the early morning trading.  By about 11AM (EDT), the Accenture shares were flirting with the 52-week high, set on Jan 4 of this year ($26.95).

Business Segment Results

Accenture's latest results also show a balanced double-digit growth across the world regions (see the chart below).  

European revenues ($1.4 billion) jumped by 27% (13% in constant currency), while those in the Asia/Pacific countries ($265 million) surged by 36% (23% in constant currency).  America's business ($1.6 billion) also grew in double digits (up 13% as reported and 12 % in constant currency).

The third quarter growth was also balanced across Accenture's industry sectors.  The government segment once again led all others with a 31% jump (up 24% in constant currency).  It was followed by financial services, communications and high-tech, and "products," each of which also grew in double digits (see the chart below).  Only the resources segment increased "only" in single digits (up 8% as reported; flat in constant currency).

Revenues in the third quarter consisted of $2.33 billion from consulting, up 13% from a year ago, and $1.36 billion from outsourcing, up 29% from a year ago.

"We are pleased with our performance in the third quarter, as we expect to post our highest net revenues ever, including growth in each of our five
operating groups and double-digit growth in each of our three geographic
areas," said Joe Forehand, Accenture's CEO, in a statement.

New Contract Sales

If there was a soft spot in Accenture's third quarter results it seemed to be its new contract bookings.  After a torrid pace in the first two quarters of the current fiscal year, the new contract sales declined from $5.2 billion a year ago, to $3.4 billion in the current quarter (see the chart below).

"Seemed" (soft), however, was the operative word here.  Based on the business already closed during the month of June, You, the CFO, said the fourth quarter new bookings will be "disproportionately strong" relative to traditional (slow) summertime sales (about $4.5 billion). So the company actually expects to exceed its earlier guidance about the full year new contract sales ($18 billion to $20 billion).

The new contracts were also spread fairly evenly across Accenture's geographies.  Europe led the way with 49% of the total, while the Americas region accounted for a 43% global share.  Asia/Pacific represented the remaining 8% of the total.

Furthermore, none of the above new booking figures include any portion of the $10 billion Homeland Security "US Visit" contract that Accenture won earlier this month as the lead vendor for a consortium of 31 U.S. companies.  

"We are cautious about not putting anything very large into the pipeline or into our budgets," said You, answering a question during the teleconference with analysts which took place before the market opened this morning.

Great Cash Flow Performance

As for cash flow, it continues to be arguably the best indicator of Accenture's outstanding business results.  

For the third quarter of fiscal 2004, free cash flow, defined as operating cash flow net of property and equipment additions, is expected to be in the range of $285 million to $300 million.  For the nine months ended May 31, 2004, free cash flow is expected to be in the range of $1.17 billion to $1.19 billion.  For the full year 2004, the company expectabout $1.5 billion.

Just to put things into perspective, IBM's 2003 cash flow was $1.7 billion.  Last year 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 $13 billion-company.  

Besides reflecting the differences in management skills, the preceding statistics point out the inefficiencies of hardware-laden companies, like IBM, versus the pure IT services operations, such as Accenture's: IBM is a cash-consuming business.  Accenture is a cash-generating machine.  Period.  Full stop.

Outlook

Accenture's outlook continues to be rosy.  In fact, it is now looking even better than three months ago, when we first noted that the company was burning the track again.  

Asked by an analyst if that's an indication that Accenture's competitors would also prosper from an increase in IT spending, You replied, "we've benefited disproportionately from our wonderful clients who are themselves doing better (than others) in their industries,"

That was a gracious way of saying that Accenture is leading the way.  And that such rapid growth may not necessarily be typical of all companies with which it competes.  For once, the stock market seems to be taking note of that (the Accenture stock is up on a day the market is down).

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004 IT: Accenture: Revving Up a Notch (Jun 2004); Beware Your CFO! (May 2004);  IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); 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 2004-14
June 17, 2004

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

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