Accenture (ACN, Financial) struggled in 2020 as the Covid-19 pandemic disrupted the business of most of its clientele, but it has shown a definite recovery over the past few quarters. The management is now focused on upgrading the company's cloud capabilities and other infrastructure as well as increasing outsourcing activity.
The company has driven a part of its growth through acquisitions and is also working towards better cloud integration by partnering with companies like Microsoft (MSFT, Financial), Amazon (AMZN, Financial), Alibaba (BABA), Oracle (ORCL, Financial), Google (GOOG)(GOOGL, Financial) and many others. After its recent stock price run-up and the Cygni acquisition, I believe that the company is at an interesting juncture.
Recent financial performance
Accenture reported a top-line of $12.09 billion for the most recent quarterly result, which was the second quarter of its 2021 fiscal year. It showed strong growth of 8.5% as compared to the $11.14 billion in revenue reported in the corresponding quarter of fiscal 2020. The company was able to beat the analyst consensus estimate of $11.80 billion due to the strong growth in Consulting as well as Outsourcing.
The gross margin was 29.74% and the operating margin was 13.68%, which was higher than that in the previous year.
Accenture reported net income of $1.44 billion and adjusted earnings per share (EPS) of $2.03, which again surpassed the average Wall Street expectation of around $1.89.
In terms of cash flows, the company reported $2.53 billion in the form of operating cash generated in the quarter whereas the amount spent on investing activities was hardly $439.36 million, implying a strong free cash generation.
The Cygni acquisition
Acquisitions continue to remain one of the key growth strategies of the company, and it recently announced its plan to acquire cloud-native full-stack development firm Cygni.
Cygni is a provider of advanced technical software development services and innovative technical solutions. It has close to 190 developers that provide a range of IT consulting and implementation services across the complete technology stack. As per the management, Cygni has experience across multiple industry sectors and in digital-led projects for the national government which is further expected to enhance the global capabilities of Accenture Cloud First.
This move signals Accenture's increasing focus on cloud-first strategies and it should be able to capitalize on the mass migration to cloud computing.
It is worth highlighting that Accenture witnessed double-digit growth in cloud overall as well as the subset of Accenture Cloud First this quarter. Moreover, Intelligent Platform Services, which are essential for building the digital core of the company's clients, is back to high-single-digit growth, reflecting the growing demand for cloud-based applications and software. These enhanced cloud capabilities are expected to go a long way in helping the company drive future growth.
Other business developments
In April 2021, Accenture and Sumitomo Chemical announced a joint venture named SUMIKA DX ACCENT, which is poised to leverage the power of artificial intelligence (AI), data analytics and other technologies to transform business.
Accenture will be providing consulting services and delivering a practical training program to help develop talent in digital technologies and intelligent operations. The venture is 80% owned by Sumitomo Chemical Group and 20% by Accenture.
In addition, Accenture has developed a comprehensive, cloud-based Paycheck Protection Program (PPP) loan application and forgiveness solution, which is built on salesforce technology, for Regions Bank. The solution will provide small businesses a less time-consuming and more intuitive application and forgiveness process in which they have more time to focus on other business prospects. All these key business developments are expected to become important growth drivers in 2021 for the company.
Valuation
As we can see from the above chart, Accenture's shares have gained more than 60% in the past 12 months owing to better-than-expected performances in most of its results and consistent generation of free cash flows.
The company is trading at an enterprise-value-to-revenue multiple of 3.81 and a price-earnings ratio of around 33.37, which are both higher than most of its IT services peers. However, the company has maintained superior margins as compared to the industry as a whole and also has a minimal reliance on debt in its capital structure with a debt-to-Ebitda ratio of only 0.38, which I think helps justify the valuation.
Overall, I believe that while Accenture may appear to be expensive at its current levels, its strong fundamentals and expected growth in the cloud services market add a strong level of future optimism, though I personally still think it would only be worth buying on dips.
Disclosure: No positions.
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