Earnings Preview: Accenture

Accenture plc (ACN - Snapshot Report) is scheduled to announce its third quarter fiscal 2012 results after the market closes on June 28, 2012. We notice some downward movement in estimates, which is surprising considering Accenture’s growth prospects.

Second Quarter Overview

Accenture delivered decent second quarter results, beating the Zacks Consensus Estimate by 11 cents on the bottom line. The quarter’s earnings came in at 97 cents per share, up 28.8% from the year-ago quarter. The outperformance was attributable to higher revenues and margins, a lower share count and tax rate, as well as favorable foreign-exchange rates.

The company’s reported revenue increased 12.3% year over year to $6.8 billion, driven by healthy performance across all segments and strong demand for its offerings across served industries. Geographical contributions were also encouraging.

Despite higher revenue, gross margin fell short of the year-ago figure due to higher subcontractor costs, recruiting and training costs, as well as an increase in annual compensation. But operating cost-control measures led to an operating margin expansion of 40 basis points.

Guidance

For the fourth quarter of fiscal 2012, Accenture expects net revenue in the range of $7.05 billion to $7.25 billion, reflecting a modest sequential comparison. This figure was arrived at after considering a 3% negative foreign-exchange impact.

Steady bookings growth, continuous deal wins and the company’s resilience against the macroeconomic backdrop led to a hike in fiscal 2012 guidance. Net revenue growth is projected in the range of 10.0% to 12.0%, up from the previous expectation of 7.0% to 10.0%. Diluted earnings per share expected were between $3.82 and $3.90, higher than the preciously expected range of $3.76–$3.84.

For the full story on the earnings release, please look at: Accenture Beats, Ups Fiscal Outlook.

Agreement of Analysts

The analysts are of opinion that Accenture’s consulting/outsourcing/offshore combination continues to support global enterprise clients’ demand for high-end but cost effective service delivery. Given its global footprint and client base, Accenture will remain well positioned to benefit from multiple technology drivers including cloud initiatives, SaaS, mobility, digital marketing, analytics, among others.

Some analysts think further margin expansion is possible over time, particularly given the company's Global Delivery Network expansion over the past few years.

But the analysts are concerned about the growing foreign exchange headwinds that can have a negative impact on its revenue as most of the company’s revenue comes from outside America. Despite Accenture’s resilient performance in the past, analysts think that the ongoing difficult economic conditions in Europe could affect Accenture’s revenues moving into fiscal 2013.

Out of the 18 and 21 estimates for the third quarter and fiscal 2012, 1 and 7 estimates, respectively, have moved downward in the last 30 days. Also, among the 21 estimates for fiscal 2013, 7 fell in the past 30 days.

We believe that the downward revisions reflect the European debt concern that could affect Accenture’s business growth in the region.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter was unaltered at 99 cents. But the movements in estimates for fiscal 2012 were somewhat negative because of the downward revision to estimates. In the past 30 days, the Zacks Consensus Estimate for fiscal 2012 moved down by a penny to $3.86. The Zacks Consensus Estimate for fiscal 2013 also decreased 5 cents to $4.23 in the past 30 days.

Recommendation

We see Accenture’s promise (in its last earnings conference call) to continue investing in priority industries (such as Communications) and emerging markets as well as boost its brand value, as encouraging. Management also seems confident of its increased fiscal 2012 guidance.

But competitive pressure from IBM Corp. (IBM - Analyst Report) and Deloitte Consulting LLP, a strained spending environment and Accenture’s European exposure compel our short-term bearish view on the stock.

Currently, Accenture has a Zacks #4 Rank, implying a short-term Sell recommendation.