Accenture (ACN) Q1 Earnings Beat Estimates, View Strong

Accenture plc (NYSE:ACN) recently reported better-than-expected first-quarter fiscal 2018 results. The company posted earnings of $1.79 per share, which came ahead of the Zacks Consensus Estimate of $1.66. Moreover, earnings increased from $1.58 per share reported in the year-ago quarter, mainly driven by higher revenues and lower share counts.

The Accenture stock has rallied 29.6% year to date, outperforming 26.5% growth recorded by the industry it belongs to.

Revenues and Bookings

Accenture’s fiscal first-quarter net revenues increased 12% year over year to $9.52 billion and surpassed the Zacks Consensus Estimate of $9.244 billion. In local currency terms, revenues grew 10% year over year. Net revenues also surpassed management’s guided range of $9.1 billion and $9.35.

The year-over-year increase was primarily driven by a 13% increase in Consulting revenues ($5.184 billion). Outsourcing revenues were up 11% on a year-over-year basis ($4.339 billion). It is worth mentioning that both Consulting revenues and Outsourcing revenues were up 11% and 9% in local currency, respectively.

Among the operating segments, Communications, Media & Technology revenues went up 11% on a year-over-year basis to $1.87 billion. Revenues from Health & Public Services and Financial Services climbed 9% and 14% year over year to $1.63 billion and $2.06 billion, respectively. Revenues from Products and Resources increased 11% and 12% year over year to $2.58 billion and $1.33 billion, respectively.

Geographically, revenues from North Americas and Europe advanced 8% and 17%, respectively. Revenues from Growth Markets (Asia Pacific, Latin America, Africa, the Middle East, Russia and Turkey) increased 13% on a year-over-year basis.

Accenture reported new bookings worth $10 billion. Consulting bookings and Outsourcing bookings for the reported quarter totaled $5.9 billion and $4 billion, respectively.

Operating Results

The fiscal first-quarter gross margin remained flat year over year at 32.1%. Accenture’s operating income was $1.49 billion or 15.6% of net revenues compared with $1.33 billion or 15.6% of revenues reported in the year-ago quarter. Accenture reported $1.19 billion of net income compared with $1.06 billion reported in the year-earlier quarter.

Balance Sheet & Cash Flow

Accenture exited the fiscal first quarter with a total Cash and cash equivalents of $3.68 billion compared with $4.13 billion in the preceding quarter. The company’s long-term debt balance at the end of the quarter was $22.2 million.

Operating cash flow for the quarter was $1.01 billion, while free cash flow was $872 million.

Share Repurchase and Dividend

In line with its policy of returning cash to shareholders, Accenture repurchased 4 million shares for $563 million during the fiscal first quarter. The company’s total remaining share repurchase authority as on Nov 30, 2017, was around $2.6 billion.

The company also paid a semi-annual cash dividend of $1.33 per share during the quarter.

Guidance

For second-quarter fiscal 2018, Accenture expects net revenues between $9.15 billion and $9.40 billion (mid-point $9.275 billion). The Zacks Consensus Estimate is pegged at $9.11 billion. The company did not provide any earnings per share guidance.

Accenture raised its lower-end revenue guidance range for fiscal 2018. The company now estimates net revenues to grow in the range of 6-8% in local currency compared with the previous predicted range of 5-8%.

Earnings per share on GAAP basis for fiscal 2018 are now projected in the range of $6.48-$6.66, up from the prior forecast of $6.36-$6.60. The Zacks Consensus Estimate is pegged at $6.54.

For fiscal 2018, the company expects operating margin in the range of 14.9-15.1%. The effective tax rate is projected to be in the range of 23-25%. Accenture expects operating cash flow of $5-$5.3 billion and free cash flow of $4.4-$4.7 billion.

Our Take

Accenture delivered impressive first-quarter results, wherein the top and bottom lines, both, surpassed the respective Zacks Consensus Estimate and marked year-over-year improvement. In addition, the company provided encouraging second-quarter and fiscal 2018 outlook.

The company’s long-term prospects look promising, driven by continued focus on innovative product roll outs, consistent investments in enhancing digital and marketing capabilities, along with major acquisitions. In addition, we believe regular acquisitions will significantly contribute to the revenue stream.

However, Accenture’s announcement of creating 15K new jobs by 2020, and investment plan of $1.4 billion for employee training and opening of 10 innovation centers across U.S. cities may dent its bottom-line results, in our opinion.

Additionally, increasing competition from peers such as Cognizant Technology Solutions (NASDAQ:CTSH) and IBM Corp. (NYSE:IBM) , and an uncertain macroeconomic environment may deter its growth to some extent.

Accenture currently has a Zacks Rank #2 (Buy).

A better-ranked stock in the same space includes Applied Materials, Inc. (NASDAQ:AMAT) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials has a long term-expected EPS growth rate of 12.7%.

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