Outsourcing and consulting giant Accenture (ACN) posted lower-than-expected second-quarter results. The quarter’s miss, coupled with a cautious outlook for its consulting business, pulled the stock down by 5%. Let’s have a look at the quarter’s key takeaways.
Quarter in a Nutshell
Accenture′s adjusted earnings of $1.03 per share were better than the year-ago level, but came a penny below the Street’s expectation. Although favorable tax rate and lower share count provided a cushion, higher payroll costs and adverse pricing took a toll on the quarter’s profitability.
Revenue of $7.13 billion grew 1% and was within the company′s guided range, but was below the Street’s $7.21 billion estimate. Higher contribution from the smaller outsourcing business was partially offset by lower contribution from the larger consulting business.
Margins were affected by lower utilization rate overall, and lower pricing and higher costs in the consulting business.
Consulting Business Remains a Drag
Accenture was hoping to post a better performance in the consulting business as first quarter new bookings had improved modestly. But the business maintained its downward trend mainly due to competitive pricing arising out of tough "discretionary" spending environment. Revenue from the business declined by 1% in the quarter.
However, new bookings in the second quarter for consulting grew to $4.6 billion (from $4.4 billion in the year-ago quarter), showing demand for Accenture’s services. Still the company expects revenue from this business to remain flat or grow in a low-single digit for fiscal 2014. This signifies that the stiff pricing environment will continue to hamper business even if the order book grows.
Outsourcing Continues to Raise Hopes
Accenture delivered impressive growth in its outsourcing revenue during the quarter backed by continuous contract wins and synergies from Procurian. It acquired Procurian last December. Particularly, demand for business process outsourcing solutions was solid, although technology outsourcing was a bit bland.
The company registered record new bookings growth in outsourcing -- new bookings grew 17% year over year to $5.5 billion. The surge pushed Accenture’s total new bookings to an all-time high of $10.1 billion.
Focus on Cloud-Based Solutions
During the quarter, Accenture further solidified its 30-year long business relationship with Germany-based enterprise software giant, SAP (SAP). The companies will now set-up a separate business group to develop customized cloud solutions for different industrial sectors.
Accenture also has a pact with cloud solutions provider Salesforce.com (CRM) under which it jointly works to transform the client’s physical business environment to a virtualized environment. During the second quarter, Accenture successfully deployed a Salesforce.com solution across 26,000 China Electric consumers and pumped up efficiency by 20%.
According to research firm IHS, global spending on enterprise cloud solutions could get tripled by 2017. Research firm Gartner also expects that the move toward cloud computing can only get faster. Close association with SAP and Salesforce will allow Accenture to benefit from the surge.
Accenture has struck the right chord by acquiring Procurian as it will hugely support the outsourcing business. Although consulting business profitability is not showing signs of improvement, new bookings growth reflects some positivity. Last, but not the least, Accenture’s growing exposure to the cloud space will be a big support to its fundamentals, going forward.