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Annex Bulletin 2009-12 June 25, 2009
A partially OPEN edition
Revenues, Earnings Drop - Analysis of Accenture's 3QFY09 business results
IBM Wins the "Gold" - Analysis of IT Services Octathlon 2009 results
Updated 6/25/09, 2:30PM HIT
Analysis of Accenture's Third Quarter FY09 Results
Revenue, Earnings Drop...
But Stock Rises 5% After Hours Despite the Declines
HAIKU, Maui, June 25 – How do you turn a 16% decline into a 5% gain? Easy, if you are an investor relations sage. First, you set Wall Street's expectations low enough. Then you exceed them. Simple. And everybody says, "hey, so and so beat the earnings. So they must be doing well. Let's load up on their shares."
Accenture showed how that's done today when it released the results for the third quarter of its 2009 fiscal year. Revenues dropped 16% to $5.15 billion (down 4% in constant currency), while net earnings declined 5% to $444 million. Yet the news sent the stock up initially about 5% to over $33 per share in after-hours trading (see above charts).
Business Segment Analysis
After peaking at $6.1 billion a year ago, Accenture's revenues have now declined sequentially in three out of the last four quarters, with the first quarter of the current fiscal year being flat with the fourth period of 2008 (see right chart). That's not the kind of a trend that we are used to seeing from the company that has been at the top of the global IT services industry in most of our rankings during the last decade and a half (see "Octathlon 2009," June 23).
Of course, a part of the "blame" rests with foreign currency translations. They accounted for about 12% of the 16% decline in the current quarter, the company said. But that's a factor that affects everybody in the global IT industry in various degrees, not just Accenture.
In terms of geographic performance, Accenture's European revenues, its biggest segment, plummeted by 23% as reported (down 5% in constant currency), while the business in the Americas declined by 10% in U.S. dollars, down 6% in local currency.
Vagaries of currency translations notwithstanding, what's more worrisome to us is that three of the five industry sectors in which Accenture operates showed declined in local currencies, too, and not just in U.S. dollars (financial services, communications & high tech, and "products" - see the left chart). And that the only real growth even in constant currency came from the public sector, its smallest segment:
What's apparent from the above numbers is that the consulting business, Accenture's "bread and butter" activity that goes all the way back to its Andersen Consulting heritage, seems to be tanking everywhere except in government work.
This trends is also discernible in Accenture's new business bookings (see right chart). While the new consulting contracts contracted by 18% in the quarter, the outsourcing sales thrived, rising by 24% during the same period. Overall, Accenture's new contracts declined about 2% from a year ago, less than the revenues or profits.
"There is a major shift from consulting to outsourcing," confirmed Steve Rohleder, the company's COO, during a teleconference with analysts that followed the earnings release.
But Bill Green, the company's CEO, said during the Q&A that it is too early to determine whether or not we are looking at trends here or "quarterly anomalies." He said that the systems integration work, for example, showed more stability than the "higher up the stack"-kind of consulting business.
"So we are going to need another quarter to answer your question with conviction," he told an analyst.
That's in part because during these difficult economic times, Accenture's revenues and profits were negatively affected by customers' contract cancelations or "rescoping" (reduction of contract values). So while the company showed its prowess at playing good offense (sales), it seems to have had more trouble keeping the business it had already sold in prior periods.
In the systems integration and outsourcing business, "pricing has come under pressure because clients are continuing to ask us to go back and reevaluate our existing arrangements with them and reduce our prices," said Rohleder. "We've also seen some pressure in the ERP area, but quite frankly, the biggest volume is in our existing business" (ERP - Enterprise Resource Planning, typically SAP- or Oracle-driven applications).
He said such "rescoping" (our term) has pushed Accenture more in the off-shore direction in order to service those clients (i.e., toward the lower labor cost markets). So while that trend doesn't impact the company's margins, it does affect the revenues, Rohleder added.
Indeed, Accenture's operating margins rose to 14.2% in the third quarter, compared with 14.1% a year ago. Which is quite a feat from a management standpoint, given the 16% revenue decline during the same period.
And the company's gross margin also improved to 32.5%, up a point from 31.5% for the third quarter of 2008. The increase was driven by improved overall outsourcing contract profitability, the company executives said.
Summary & Outlook
Looking ahead, Green, the CEO, sounded an optimistic note when commenting about the outlook for calendar 2010. He said he was hoping that the clients would start implementing the projects that had been put on hold during these difficult economic times.
"If we can get a nice kick as people start the planning and work for the 2010 business... we think that's going to serve us well," he said. "That's all instinct at this point," he qualified his opinion. "But that's what we are seeing at this point in (our) client base."
Accenture expects revenues for the fourth quarter of fiscal 2009 to be in the range of $5.0 billion to $5.2 billion. Which puts the company on course to end up the full fiscal year with about $21.5 of revenues, down 8% from the year before. And that's exactly what our forecast calls for as well.
The company said it expects full year bookings between $23 billion and $25 billion and the EPS for the full fiscal year in the range of $2.67 to $2.70. The company’s previous guidance was $2.60 to $2.67.
Which means that Accenture can deliver strong bottom line results even at a time when its top line comes under pressure, such as at this point in time in the marketplace, leading to its first ever annual revenue decline.
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