Accenture plc (NYSE:ACN) reported better-than-expected third-quarter 2014 results on June 26. But a tepid outlook for fiscal 2014 curbed investor confidence, sending shares down by 1.9%. True that the stiff pricing scenario somewhat blurs the company’s growth prospects, but there are some key factors that investors should not ignore. Let’s find them out, but before that a quick earnings recap is necessary.
Key Takeaways from the Quarter
Accenture reported net income of $0.9 billion that translates to earnings of $1.26 per share, up 10.5% from the year-ago quarter. The improvement was on account of its revenue that grew to $7.7 billion, 7% higher over last year. Both the top and bottom lines were ahead of the street’s expectations.
Revenue growth was supported by strength across all the operating segments. In particular, the outsourcing business continued to be the key driver that saw a 10% revenue growth. This apart, growth in Europe, Middle East and Africa (EMEA) region as well as Product operating group were encouraging.
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Gross margin was affected by lower utilization rate and lower pricing, though the company’s cost saving efforts brought in some relief. Accenture was able to keep its operating cost under check which arrested the decline in operating margin.
The company reduced operating margin as well as earnings per share expectations for fiscal year 2014, reflecting tight spending environment. Despite such pessimism, here are some reasons why investors should have their faith intact.
Strength in Consulting Business Seems Underway
High margin consulting business generates highest contribution for Accenture; hence any improvement in the business will ensure solid growth for the company. Lately, the company was facing doldrums in the business due to restricted ‘discretionary spending’ and stiff price competition. Considering the scenario to continue, it had projected flat or low-single digit revenue growth from the business in the second-quarter.
However, it witnessed a rebound this quarter, which reversed the revenue declining trend seen in the past quarters. Revenue from the consulting business grew 5.7% mainly because of higher demand for new solution and new contract signings.
Third quarter bookings for consulting business were strong, reflecting solid demand for its systems integration and technology consulting solutions. Though competitive pricing could continue to be a concern, higher number of contracts could boost Accenture’s market share against archrivals Hewlett-Packard Co (NYSE:HPQ) and IBM (NYSE:IBM).
Growing Focus on Europe
Accenture recorded an impressive 13% revenue growth from EMEA, the highest among the three reporting regions. The improvement was driven by double-digit growth in France and Italy, high- single-digit growth in Germany, and sustainable growth in the United Kingdom.
Contribution from Europe could grow substantially in the coming quarters as technology spending is improving and Accenture is preparing solid ground in the region. It’s currently preparing to support Fiat-Chrysler Group’s (after American carmaker Fiat S.A. acquired 100% of Chrysler last January) connected services in EMEA.
Moreover, the consulting giant is actively taking part to digitize large European banks to increase their productivity. With its application development and management services, the company aims to increase productivity of the banks by up to 20%.
Earlier this year, the company expanded its cloud horizon in association with SAP AG (SAP) and Orange Business Services, an arm of French Telecom, to meet the growing cloud services demand in Europe. EMEA is the second largest market of Accenture and signs of recovery in IT spending in Europe bode well for the company.
Returning Shareholder Value
The company has maintained a good history of returning shareholder value through share buyback and paying dividends. This past quarter, Accenture bought roughly 5.5 million shares worth $441 million and paid $0.93 semi-annual dividend per share.
The company generated $1.4 billion cash from operations and free cash flow of $1.3 billion. Considering the level of free cash, Accenture’s promise of returning shareholder value continually looks pretty encouraging. Notably, the company continues to expect to return roughly $3.7 billion during full fiscal 2014.
Along with solid footing in outsourcing business, regaining strength in the consulting business could push Accenture to new heights. Moreover, further penetration in Europe could open up added stream of revenue. These could drive the company’s profitability enabling it to keep its long-term value investors happy.