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A SPECIAL ANNEX NEWSFLASH

Analysis of Accenture's Fiscal 2004 Business Results

Revenues, Profits Up, Stock Down

All Business Units Report Solid Growth

PHOENIX, Oct 13 - By now, we should be getting used to Wall Street's logic.  The "what have you done for me lately?"-expression should be perhaps rephrased to "what have you done for me tomorrow?" - linguistic and logical incongruities notwithstanding.  

Accenture's fiscal year 2004 fourth quarter results, released this morning before the markets opened, are a case in point.  "Accenture Posts 52 Percent Profit Surge," read the Associated Press headline.  Yet the stock dropped about 14% in early morning trading.

A closer look under the hood shows that Accenture has been indeed firing on all cylinders.  Its net income was $183 million, or 30 cents a share, for the fiscal fourth quarter ended Aug. 31, compared with $120.5 million, or 25 cents a share, in the same quarter a year earlier.

In July, the company had forecast fourth quarter profit of 26 to 29 cents a share.  The latest results beat the average estimate of analysts polled by Thomson First Call of 28 cents a share.

Revenues were also up in double digits (up 13% for the fourth quarter; up 16% for the full fiscal year) to $13.7 billion, exceeding our forecast of $13.4 billion.  All Accenture lines of business - horizontal, vertical and geographic - grew, both in the quarter and for the fiscal year.  

Free cash flow was $1.47 billion, up from $1.3 billion the year before.  Cash or cash-equivalent balance was $3.15 billion, up from $2.42 billion at the end of FY03.  Total debt was a practically negligible $34 million.

New bookings for FY04 were $20.1 billion, exceeding considerably the forecast from a year ago of $16 billion to $18 billion.

Good Quarter, Stellar Year

In short, it was a good quarter and a stellar year for Accenture, especially by comparison to its industry rivals' results (e.g., EDS).  The ostensible reason for a sharp drop in the Accenture stock price was a management warning that profits in the current quarter could fall below analyst estimates, and that new profitable deals may be harder to get in months ahead.

"Compared with the opportunity and deals we saw a year or two ago, there is a dramatic change in quality," Accenture's new chief executive, Bill Green, told Reuters.  "Some of the best deals you win are the ones you lose," Green added. "If we think the pricing is going to be very irrational or commodity-like, we withdraw from that."

Perhaps that's why the company's guidance for the fiscal 2005 new bookings is in the $18 billion to $20 billion range, below the new contract sales Accenture achieved in FY04.  Which may have been another reason that evidently spooked Wall Street this morning.

Business Segments

Meanwhile, as to what Accenture did do "for its shareholders lately," it reported solid growth in all of its business segments.  

Financial services and government continue to lead all other industry sectors, surging by 25% and 13% in the latest quarter, and by 18% and 26% respectively for the full fiscal year.  Communications & Hi-Tech, Products and Resources also grew in double digits.

The Asia/Pacific area continues to show the most robust growth among Accenture's global geographic regions.  It was up 28% in the latest quarter, and up 22% for the full year.  Europe also showed strong growth with 25% and 23% corresponding increases.  Both sets of results, of course, were boosted by foreign currency translations and the weak U.S. dollar.

If there was a problem region in the fourth quarter, it was the Americas of which the U.S. is by far the biggest part.  This geographic area grew by only 1% in the latest period, even though it was up by 8% for the full fiscal year.  Perhaps the U.S. market is where the competitive turf is getting more saturated, causing Accenture to beg off less profitable deals, as its CEO suggested.

Outlook

But putting profitability ahead of growth is not what Wall Street wants to hear.  Investors want them both.  Finding (new) ways to grow despite increased competitive pressures is evidently a challenge the market is expecting Accenture to overcome.  

Diversifying into new markets, such as the small and medium (SMB) size businesses, is one way of doing it.  Alas, profitability may suffer as a result, at least in the short term.  But as Capgemini's recent results have shown, one can have it both ways.  Capgemini's SMB segment "is showing the "highest operating profitability" and the fastest growth, according to its latest release.  

Given Accenture's excellent actual results, having market perceptions lag behind is clearly something the company needs to address, and fast.  Communicating to Wall Street new strategies for continued profitable growth, and doing it clearly and unambiguously, is both a marketing and a financial test that Accenture's new leaders will have to pass if they are to reverse the downward slide of the stock. 

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004 IT:  Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004) HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 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 2004-20
October 130, 2004

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

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