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Accenture Positive on Outsourcing Business, Risks Remain

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We issued an updated research report on Accenture (ACN - Free Report) on Aug 8, 2014 post its solid third-quarter results. Revenues also improved on a year-over-year basis reflecting an increased focus on the Outsourcing business, new bookings and continuous return of shareholders value. Moreover, the company provided a modest guidance.

Accenture’s solid performance across insurance, banking and healthcare segments reflects strong demand for its services, boosting long-term growth prospects. Accenture has been steadily gaining traction in its Outsourcing business. The success is primarily attributed to the increase in demand for technology that can improve operating efficiencies and save costs. The upward trend continued during the first nine months of fiscal 2014, with outsourcing revenues growing 6% on a year-over-year basis. The improvement was mainly due to the growing demand for Accenture’s outsourcing solutions driven by most of its operating industry groups across all geographic regions.

Over the past couple of years, Accenture has made several acquisitions to expand its product and service offerings and cater to a diverse clientele. During fiscal 2013, Acquity Group Ltd. — a digital marketing and technical services provider — was acquired along with other smaller companies that complement and synergize with Accenture’s current operations. Acquisitions are likely to enable Accenture to enter new markets, diversify and broaden its product portfolio and maintain its leading position. Moreover, the company’s continued acquisitions are expected to be a good contributor to its revenue stream.

Also, Accenture has a strong balance sheet. As of May 31, 2014, the company had cash and cash equivalents of $4.05 billion and long-term debt of $26.5 million, bringing the net cash position to $4.02 billion, higher than $3.65 billion (net cash) in the previous quarter. This enables the company to look for strategic acquisitions and invest in growth initiatives. Strong operating cash flow has helped Accenture to return cash through regular quarterly dividend payment and share repurchases.

Nonetheless, revenue decline in Accenture’s Consulting business remains a concern. In fiscal 2013, consulting revenues decreased 1% on a year-over-year basis due to lower revenues across its five operating groups as clients continue to defer or reduce investments in consulting services. Although the company’s consulting revenues recorded a modest increase in the last reported quarter, we will be more constructive if this phenomenon continues in the forthcoming quarters as well.

Moreover, Accenture’s market share and revenues necessarily depend on client relationships and the number of contracts it secures. This, along with the limited scope for product differentiation, makes the renegotiation of large contracts extremely important. As a result, competition from major players like Genpact Limited (G - Free Report) , Cognizant Technology Solutions (CTSH - Free Report) and Infosys (INFY - Free Report) is a constant pressure.

Currently, Accenture has a Zacks Rank #3 (Hold).

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