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Accenture Plc Q2 Earnings Preview: What To Watch

 March 25, 2013 01:10 PM

(By Mani) Accenture Plc (NYSE: ACN) is set to report its second quarter financial results on March 28. The company will host a conference call at 8:00 a.m. EDT on the same day to discuss the results.

Dublin, Ireland-based Accenture is a global management consulting, technology services and outsourcing company, with about 259,000 people serving clients in more than 120 countries. It generated revenue in excess of $27 billion for the fiscal year ended Aug. 31, 2012.

Wall Street expects the BPO firm to report second-quarter earnings of 97 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate remained flat with last year.

[Related -Accenture Plc (ACN): Continuing To Deliver A Growth Story]

In the preceding four quarters, Accenture has managed to beat Street view thrice, with upside surprise ranging from 1 percent to 12.8 percent. In the past 90 days, the consensus view remained unchanged at 97 cents a share.

Quarterly revenue is expected to rise 4 percent to $7.07 billion from $6.80 billion a year-ago. For the second quarter, Accenture expects net revenues of $6.9 billion to $7.15 billion.

Among the key metrics, bookings growth should be closely watched, especially on the consulting front. Accenture should have strong consulting signings in the February quarter, after weak November-quarter signings. Rivals such as International Business Machines Corp. (NYSE: IBM) reported strong growth of 9 percent in GBS signings in the December quarter after struggling for the last few quarters.

[Related -Accenture Plc (ACN): Technology Consulting Stock Accenture Is My Next Dividend Pick]

In addition, Cap Gemini had strong signings in the December quarter with a book-to-bill ratio of 1.16 in consulting and tech services practice.

"We forecast Accenture to report consulting signings of ~$4.0-$4.3 billion in the February quarter, or roughly flat y/y," BMO Capital Markets analyst Keith Bachman wrote in a note to clients.

On the outsourcing perspective, Accenture continues to execute very well as its revenue growth rate is comparable to some of the large Indian service providers. In the last four quarters, outsourcing revenues have grown at a healthy rate of about 18 percent.

"We forecast outsourcing revenues to grow by about 12%-13% over the next four quarters, mainly due to tougher comparisons and some slowdown in consulting, which can impact future downstream outsourcing revenues," Bachman said.

Accenture's outsourcing signings trend have to improve to maintain its strong growth profile, and recent comments about most service providers primarily focused on outsourcing have been generally more positive. Most service providers believe that companies will continue to spend on cost savings initiatives to free up IT budgets, which can then be spent on innovation.

Moreover, regulatory-related spending would also pick up in some industries such as financial services and healthcare as the companies set up systems and processes to comply with new regulations.

"After a very weak November quarter, we forecast Accenture to report signings of ~$4.25 billion in the February quarter," the analyst noted.

Meanwhile, Accenture's margins could provide some EPS upside even as revenue growth remains around 7 percent. Accenture's gross margins grew by 100 basis points (bps) in the November 2012 quarter, after declining an average 70 bps in the last two years.

"We currently forecast GM to grow by 20 bps in FY13 mainly due to strong performance in the November 2012 quarter. For every 10 bp improvement in GM, EPS could be higher by $0.03-$0.04, all else equal," Bachman said.

The focus would also be on the 2013 outlook, which the company may reiterate. For the full year 2013, Accenture sees earnings of $4.24 to $4.32 a share, and net revenue growth of 5 to 8 percent in local currency. Analysts currently expect earnings of $4.26 a share.

In addition, investors would look for additional comments about the pace of project ramp in February and early March, especially in the more discretionary consulting and system integration engagements on the conference call. Any positive commentary about the May quarter would be a strong positive for the company and other services providers.

For the first quarter, Accenture reported quarterly net income of $699 million or $1.06 a share, compared with $642 million or 96 cents a share last year. Revenues rose 2 percent to $7.22 billion. Consulting net revenues for the quarter fell 3 percent to $3.96 billion while outsourcing net revenues improved 9 percent to $3.26 billion.

Since reporting its first quarter results on Dec.19, the stock has gained 5 percent and 12 percent in the last one year. Out of 26 analysts covering the stock, 15 have a "buy" or strong buy" rating while 11 recommend "hold." There were are no  "sell" ratings on the stock, which has traded between $54.94 and $78.46 during the past 52-weeks.



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