(ACN) Accenture Third Quarter 2011 Earnings Preview

Accenture Plc (ACN) is scheduled to announce its third quarter of fiscal 2011 results on June 23 after market close. There have been some changes in analysts’ estimates post its second quarter 2011 results.

Second Quarter Recap

Accenture posted impressive second quarter results, with earnings per share (EPS) of 75 cents, beating the Zacks Consensus Estimate of 71 cents. Accenture reported second quarter 2011 net revenue of $6.05 billion, up 16.9% from $5.18 billion reported in the year-ago quarter. Net revenue was also above the company’s guided range of $5.6 billion to $5.8 billion. The upside in net revenue was attributed to the significant increase in revenues across Accenture’s operating segments and healthy demand for its offerings across the industries served.

Consulting and Outsourcing revenues increased 20.0% and 13.0% from a year ago to $3.51 billion and $2.54 billion, respectively. Geographically, year-over-year increases of 21.0%, 9.0% and 34.0% were witnessed in revenues from the Americas, Europe Middle East and Africa (EMEA) and the Asia-Pacific region, respectively.

Total operating expenses grew 10.5% year over year, due to higher sales and marketing expenses (up 13.9%) and general and administrative expenses (up 5.4%). However, as a percentage of net revenue, operating expenses plunged 110 bps from the year-ago quarter. The operating margin was 12.7% versus 12.6% in the year-ago quarter.

Guidance

For the third quarter of fiscal 2011, Accenture expects net revenue in the range of $6.3 billion to $6.5 billion. Diluted EPS expectation has been upgraded to $3.22–$3.30 from the previously guided range of $3.08–$3.16. The earnings guidance surpassed the Zacks Consensus Estimate of $3.16.

Agreement of Analysts

Out of the sixteen analysts providing estimates for the third quarter, one analyst raised estimates in the last thirty days. For the fourth quarter also, just one analyst raised estimates over the last thirty days. However, for fiscal year 2011, two analysts have raised their estimates in last seven days. There were no other estimate revisions over the last 30 days. For fiscal year 2012, all of them raised their estimates over the last seven days.

According to some analysts, ACN continues to be the largest independent consultant in the world. Strong brand reputation and solid client base enhances the company’s competitive edge. Moreover, analysts are of the opinion that Accenture is moving on the same line as other offshore IT companies that are expanding their operations in the overseas market.

Moreover, the analysts also believe that the company is intent on expanding margins through the development of the Global Delivery Network over the past few years. However, Accenture’s margins are currently below those of competitors International Business Machine (IBM) and Hewlett-Packard Company (HPQ).

The analysts also believe that financial services (21% of net revenue) will be a primary driver for revenue and bookings, attributed primarily to post-merger integration, risk and compliance demand. From a geographical standpoint, the Americas witnessed significant growth, contributing around 44% of net revenue, while EMEA continued to recover slowly. However, APAC was impacted by the lingering effects of the Japan earthquake.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter of fiscal 2011, increased by 4 cents over the last 90 days while for fiscal 2011 and 2012, estimates moved up by 11 and 14 cents, respectively, to $3.27 and $3.67 over the last 90 days.

Recommendation

Favorable trends in Accenture’s businesses, new business wins and improvement in new bookings are positives for the company. Based on improving business momentum and increasing technology spending, Accenture raised its revenue and earnings guidance for fiscal 2011. Moreover, the company is also expected to gain from the recovery of the financial services sector. We are encouraged by the steady flow of new business arising from higher tech spending in 2011.

The company has a Zacks #2 Rank, implying a Short-term Buy rating.

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