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Accenture plc (ACN - Analyst Report) reported second-quarter fiscal 2014 earnings per share of $1.03, missing the Zacks Consensus Estimate of $1.04. On a year-over-year basis earnings increased 3%. Year-ago quarter’s earnings excluded benefits from certain U.S. federal tax liabilities and reorganization benefits.

The year-over-year increase was attributed to higher revenues, lower effective tax rate and lower share count, which more than offset lower non-operating income.

Revenues and Bookings

Although Accenture’s second-quarter net revenue increased 1.0% on a year-over-year basis to $7.13 billion it lagged the Zacks Consensus Estimate of $7.22 billion. Net revenue also were within management’s guided range of $6.95 billion to $7.25 billion, primarily aided by higher-than-expected Outsourcing revenues (up 4.0% on a year-over-year basis to $3.43 billion), which more than offset Accenture’s Consulting revenues, down 1% year over year to $3.70 billion.  

Among the operating segments, Health & Public Services revenues decreased1.0% from the year-ago quarter to $1.18 billion while revenues from Financial Services were up 4.0% from the year-ago quarter to $1.56 billion.

Accenture’s revenues from Products of $1.75 billion increased 4.0% while revenues from Resources decreased 2.0% from the year-ago quarter to $1.22 billion. Communications, Media & Technology revenues remained flat on year-over-year basis at $1.41 billion.   

Geographically, revenues from the Americas, and Europe, the Middle East and Africa (EMEA) increased 2.0% each on a year-over-year basis, while revenues from the Asia Pacific region recorded a decline of 7.0% from the year-ago quarter.

Accenture reported new bookings of $10.1 billion during the quarter, which were down 2% from the year-ago quarter primarily due to foreign currency fluctuations. Consulting bookings and Outsourcing bookings for the quarter amounted to $4.6 billion and $5.5 billion, respectively.

Operating Results

Second-quarter gross margin decreased 30 basis points (bps) from the year-ago quarter to 31.3%, primarily due to higher cost of services.

Operating expenses increased 20.0% from the year-ago quarter to $1.28 million, primarily due to the absence of reorganization benefit that positively impacted the year-ago quarter results. As a percentage of net revenue, operating expenses expanded 280 bps to 17.9% from the year-ago quarter.

Accenture’s operating income decreased 18.2% from the year-ago quarter to $951.3 million, while margins contracted 320 bps to 13.3%, primarily due to higher operating expenses. Moreover, pricing pressures and high payroll costs impacted operating results. Accenture reported net income of $714.2 million or $1.03 per share.  

Balance Sheet & Cash Flow

Accenture exited the quarter with total cash balance of $3.68 billion versus $4.53 billion in the preceding quarter. Accenture’s long-term debt balance at the end of the second quarter was $26.3 million.

Operating cash flow was $292.4 million in the reported quarter compared with $181.0 million in the prior quarter while free cash flow for the quarter was $216.0 million.
 
Share Repurchase and Dividend

Consistent with Accenture’s policy of returning cash to its shareholders, the company repurchased 9.2 million shares for a total value of $739.0 million during the second quarter. The activity included 6.5 million shares repurchased in the open market. Accenture did not pay dividends for the quarter.

Guidance

For the third quarter of 2014, Accenture expects net revenue between $7.40 billion and $7.65 billion. The Zacks Consensus Estimate is pegged at $7.54 billion. The company did not provide any guidance for third quarter earnings.

The company modified its guidance for fiscal 2014. Accenture expects net revenue to grow in the range of 3.0% to 6.0% in local currency.. It has also upped its earnings per share outlook from the range of $4.44-$4.56 to $4.50-$4.62. The Zacks Consensus Estimate is pegged at $4.50 per share .The company expects new bookings in the range of $33 billion-$36 billion (previous guidance of $32 billion-$35 billion).

For fiscal 2014, the company expects its operating margin to range between 14.3% and 14.5%. Operating cash flow is expected in the range of $3.3 billion-$3.6 billion (previous guidance of $3.6 billion-$3.9 billion), while free cash flow is likely to be in the range of $2.9 billion-$3.2 billion (previous guidance of $3.2 billion-$3.5 billion).  

Recommendation

Accenture delivered a dismal second-quarter results, wherein both the top and bottom lines missed the Zacks Consensus Estimate. However, revenues increased on a year-over year basis reflecting an increased focus on the Outsourcing business, new bookings growth and continuous return of shareholders’ value. Moreover, the company provided an encouraging guidance as well.  Nonetheless, its consulting business was a bit of a disappointment.

Improved bookings growth and solid performance across insurance, banking and healthcare segments reflects strong demand for Accenture’s services, boosting long-term growth prospects. However, increasing competition from Cognizant Technology Solutions (CTSH - Analyst Report) and IBM (IBM - Analyst Report), a strained spending environment and Accenture’s broad European exposure may temper its growth prospects to some extent.

Currently, Accenture has a Zacks Rank #2 (Buy). Investors may also consider Lexmark International Inc. (LXK - Analyst Report), which carries a Zacks Rank #1 (Strong Buy).

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