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Accenture (ACN) Q3 Earnings & Revenues Beat, View Strong

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Accenture plc (ACN - Free Report) reported better-than-expected third quarter fiscal 2016 results.

Its third quarter fiscal 2016 earnings per share of $1.41 beat the Zacks Consensus Estimate of $1.40 per share. Also, earnings increased on a year-over-year basis, primarily attributable to higher revenues, lower tax rate and share count.

Revenues and Bookings

Accenture’s third quarter net revenue not only increased 8.6% year over year to $8.434 billion but also surpassed the Zacks Consensus Estimate of $8.246 billion. In local currency terms, revenues increased 10% year over year. Net revenue also came ahead of management’s guided range of $8.10 billion and $8.35 billion, primarily aided by a 12% increase in Consulting revenues ($4.62 billion). Outsourcing revenues increased 4% on a year-over-year basis ($3.81 billion). It is worth mentioning that Consulting revenues increased 14% in local currency whereas Outsourcing revenues increased 6% in local currency.

Among the operating segments, Communications, Media & Technology revenues were up 6% on a year-over-year basis to $1.71 billion. Revenues from Health & Public Services and Financial Services increased 11% and 10% year over year to $1.54 billion and $1.80 billion, respectively. Revenues from Products increased 15% on a year-over-year basis and came in at $2.16 billion. Resources, however, decreased 2% on a year-over-year basis to $1.22 billion during the quarter.

Geographically, revenues from the North Americas and Europe increased 10% and 11% on a year-over-year basis, respectively. Revenues from Growth Markets (Asia Pacific, Latin America, Africa, the Middle East, Russia and Turkey) were flat on a year-over-year basis.

Accenture reported new bookings of $9.1 billion during the quarter, which were negatively impacted by foreign currency fluctuations. Consulting bookings and Outsourcing bookings for the quarter amounted to $4.9 billion and $4.2 billion, respectively.

Operating Results

Third quarter gross margin decreased 60 basis points (bps) on a year-over-year basis and came in at 31.9%, primarily due to higher cost of services.

Combined sales and marketing expenses and general and administrative costs increased 4.3% from the year-ago quarter to $1.38 billion. However, as a percentage of net revenue, these expenses were down 70 bps on a year-over-year basis and came in at 16.4%.

Accenture’s operating income came in at $1.31 billion or 15.5% of net revenue compared with $1.13 billion or 14.6% of revenues reported in the year-ago quarter. Accenture reported $939.8 million in net income or $1.41 per share.

Balance Sheet & Cash Flow

Accenture exited the quarter with total cash balance of $3.50 billion compared with $3.04 billion in the preceding quarter. Accenture’s long-term debt balance at the end of the third quarter was $26.8 million.

Operating cash flow was $1.59 billion in the reported quarter while free cash flow was $1.50 billion.

Share Repurchase and Dividend

In line with its policy of returning cash to shareholders, Accenture repurchased 4.3 million shares for $478 million during the third quarter. The company declared a semi-annual cash dividend of $1.10 per share during the quarter.

Guidance

For the fourth quarter of fiscal 2016, Accenture expects net revenue between $8.25 billion and $8.50 billion (mid-point $8.375 billion). The Zacks Consensus Estimate is pegged at $8.307 billion. The company did not provide any earnings per share guidance.

Accenture updated its guidance for fiscal 2016. The company now expects net revenue to grow in the range of 9.5% to 10.5% in local currency (previously 8% to 10%). Accenture now expects earnings guidance per share in the range of $5.29–$5.33 (previously $5.21–$5.32). The Zacks Consensus Estimate is pegged at $5.32 per share.

For fiscal 2016, the company now expects operating margin to be 14.6%. Effective tax rate is now expected to be in the range of 24% to 25% (previously 22.5% to 23.5%). Accenture reiterated its operating cash flow ($4.1 billion to $4.4 billion) and free cash flow ($3.6 billion to $3.9 billion) guidance.

Our Take

Accenture delivered better-than-expected third quarter fiscal 2016 results. Also, revenues increased on a year-over-year basis, reflecting increased focus on the Consulting and Outsourcing business, new bookings and continuous return of shareholders’ value. Moreover, the company provided an encouraging fourth quarter and fiscal 2016 revenue guidance.

Going forward, Accenture’s solid performance across insurance, banking and health care segments reflects strong demand for its services, which will boost its long-term growth prospects.

However, increasing competition from Cognizant Technology Solutions (CTSH - Free Report) and International Business Machines Corporation (IBM - Free Report) , a strained spending environment and Accenture’s broad European exposure may temper its growth to some extent.

Accenture has a Zacks Rank #2 (Buy). Investors may also consider Facebook, Inc., which sports a Zacks Rank #1 (Strong Buy).

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