Annex Newsflash 2005-30                             October 6, 2005



Updated 10/07/05, 7:20 AM PDT (adds stock market update)

Analysis of Accenture's Fourth Quarter Business Results

A Whopper Quarter

Record Harvest of Records in Fourth Quarter, FY2005

PHOENIX, Oct 6 It doesn't get much better than this.  Not when it comes to large public companies' quarterly results.  Accenture delivered a whopper of a fourth quarter in its fiscal year 2005 (ended August 31), shattering scores of revenue, earnings, bookings and cash flow records.  It was a magnificent finish to a great year, the second in a turnaround that started in late 2003/early 2004 (see the chart).

"We are exceptionally pleased" with the latest results, Bill Green, the company's CEO, told the analysts in a teleconference that followed Accenture's earnings release, after the markets closed today (Oct 6).  And who wouldn't be?  

Revenues were up 15% in the quarter, bringing the year's total to $15.5 billion, up 14% over the last fiscal year's (which was up 16% over FY03).  Net earnings were up 25% to $229 million in the quarter, while operating profit surged by 37% to $509 million.  Free cash flow in the quarter was $436 million, lifting the fiscal year total to $1.57 billion, another record.  New contract sales surged to $5.2 billion, the best quarterly record in the last six quarter (see above chart).  And the company announced its first ever cash dividend.

"Across the board, we feel we are well positioned to begin our new fiscal year," Green summed up the sentiments of the companies' 250 or so leaders who congregated in Frankfurt, Germany last week for a year-beginning kick-off.

And what did Wall Street think of such stellar results?  Well, investors did push the Accenture stock up 2% in after-hours trading, on the heels of a 1.2% gain in regular trading to $25.25.  But considering the depth and the breadth of Accenture's outstanding quarterly performance, such a small increase was tantamount to a tepid applause.  And its two-month stock trend has been basically flat, in the $25 to $26 range (see the chart).  Guess given the overall bearishness of the market these days, one must take what one can and be grateful for small mercies.  Any gain is better than a drop.

Business Segment Analysis

Geographies.  Although all five operating units achieved double digit revenue growth in the fourth quarter, the Americas region, of which the U.S. market is the biggest component, was the standout.  It surged by 22% over the corresponding quarter a year ago.

"There is a lot of energy in the U.S. (unit)," noted Green.  

"Both business consulting and S.I. (systems integration) are up in the U.S.," added Steve Rohleder, the COO.  In Europe, which rose by 9%, the growth has been spearheaded more by outsourcing.  Rohleder said the pricing was "stable," which enabled the company to improve its profitability while growing the business.

The Asia/Pacific region also reached a milestone in the current fiscal year.  After a strong fourth quarter in which revenues increased by 10%, the unit surpassed the $1 billion-revenue mark for the first time, finishing  the fiscal year 2005 with a $1.1 billion total.

The company is continuing to pursue aggressively its "offshoring" strategy.  After adding 42,000 people, a third of its work force (122,000), to its payroll in the last 12 months, Accenture now has about 35,000 people in its global delivery network.  Over 16,000 of those are in India, said Rohleder, the COO.

Industries. Among Accenture's various industry units, the "products" group, which encompasses transportation, health case, retail and consumer products, grew the fastest in the fourth quarter, increasing its revenues by 23% (20% for the year).  Financial services, the company's best performing area for the year, came in second in the fourth quarter with a 15% surge.

"Our financial services business came back like gangbusters," said Green, the CEO, answering an analyst's question. 

The resources sector was also strong, boosting its revenues by 14% for the quarter and by 10% for the year.

But Accenture's biggest and the most profitable segment is communications and high tech, noted Rohleder, the COO.  Its fiscal year 2005 revenues exceeded $4 billion, thanks in part to a rebound in the electronics and high tech sector.


Perhaps the most important distinguishing characteristic of Accenture relative to its competitors is the company's ability to generate cash.  Lots of it.  In the fiscal year 2005, operating cash flow amounted to $1.9 billion while the free cash flow was $1.6 billion.  In the fiscal year 2006, the company expects to generate operating cash flow of $2.0 to $2.2 billion, and the free cash flow of $1.55 billion to $1.75 billion.

"We've proven that we have a distinctive ability to generate cash," said Green summarizing Accenture's performance.

No other company we follow comes even close to Accenture in that respect relative to its size.  A much bigger EDS (a $20 billion+ company), for example, generated only $305 million in free cash flow in 2004, and it expects to improve that to $500 million to $700 million in 2005.  But as we said back in February, "that excluded the $522 million 'pay-down on the NMCI securitization facility,' for reasons that remained unclear even after the EDS executive tap dance" (see "EDS: Grossly Overpriced Stock," Feb 2005).

No wonder Accenture has started to return its cash to shareholders in multiple ways.  During the fourth quarter, the company repurchased $542 million of its shares, boosting the fiscal year's total stock buybacks to $1.6 billion.  And it just declared its first ever cash dividend of $0.30 per share. 

"Over time, we may shift the mix to paying a higher dividend," said Mike McGrath, the company's CFO.  

Both moves show the company's "commitment to return cash to shareholders," noted Green, the CEO.  And that ought to be music to Wall Street's ears.

Annex Clients: Click here and here for detailed Accenture 2006 P&L forecasts by industries and geographies

Happy bargain hunting!

Bob Djurdjevic

P.S. Phoenix, Oct 7 - The Accenture stock was up more than five points to $26.60 in heavy trading this morning on the New York Stock Exchange.  

For additional Annex Research reports, check out... 

2005 IT: Accenture: A Whopper Quarter  (Oct 2005);  Global Investments: New "Drang Nach Osten" (Sep 2005);  HP: Sweet Turnaround (Aug 2005);  Dell Spooks Street (Aug 2005);  EDS Ups Its Forecast (Aug 2005);  Capgemini Beats Forecast (July 2005);  Fujitsu: Losses Reversed; Forecast Upgraded (July 2005);  IBM: Polaris Eclipses T-Rex (July 2005);   IBM Bounces Back (July 2005); Accenture: Smashing Records (July 2005); Merrill's New Bull (EDS) (May 2005);  IBM Trumps Trump (May 2005);  Tweaking Big Blue (May 2005); Hurd's First RBI (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Fujitsu Revenues Flat, Lower Net (Apr 2005); Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);  Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); 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)

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

Volume XXI, Annex Newsflash 2005-29
September 30, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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