Accenture Sees Light At The End Of The Tunnel

The IT services and consulting space, which until mid-2009 was on a declining trend, seems to be stabilizing. Key players in the industry such as Infosys, Wipro, Cognizant, IBM, Tata Consultancy Services, and Accenture are sounding more confident going into 2010 than they were six to nine months ago. The companies are making small to mid-sized deals in application maintenance and development, infrastructure outsourcing, risk management, cost takeouts, data analytics, and business process outsourcing (BPO). A pickup in the financial services vertical is another positive for the industry. The larger players are seeing business trickling in, and the continuing need for clients to rationalize costs will ensure that the outsourcing business grows in 2010.

Accenture (NYSE:ACN) announced its Q110 results on December 17. Net revenues for the quarter ended November 30 were $5.38 billion, a decrease of 11% from $6.02 billion in the same period last year. Gross margin was 33.1% in Q110, up from 31.4%, a 170 basis point increase over Q109. Operating income for Q110 was $746 million, or 13.9% of net revenues, compared to $815 million, or 13.5%, in Q109. Net income before non-controlling interests for Q110 declined 12% to $525 million from $593 million in Q109. EPS for Q110 was $0.67, a decrease of $0.07 from Q109.

The company generated free cash flow of $184 million in Q110, compared to $396 million in Q109 mainly due to an increase in days services outstanding (DSO) from Q409. After paying annual dividends, Accenture maintains a strong balance sheet with a cash balance of $4 billion.

At 88%, utilization in Q110 was 88%, compared to 83% in Q109. Attrition was 12% in Q110 compared to 13% in Q109. Consulting net revenues for the quarter were $3.12 billion, a decrease of 15% from Q109. Outsourcing revenues were $2.26 billion, a decrease of 4% from Q109. The year-over-year consulting revenue decline was influenced mostly by two operating groups — Communications & High-Tech and Products.

Accenture’s Communications & High-Tech segment was the hardest hit. Revenues for Q110 were $1,159 million, a decrease of 15%, from the $1,364 million recorded in Q109. Financial Services revenues were $1,104 million, a decrease of 11% from the $1,238 million earned in Q109. Revenues of the Health & Public Services segment increased marginally to $947 million, compared with $943 million in Q109. Products revenues decreased 13% to $1,204 million from the $1,385 million recorded in Q109. Resources revenues decreased by 11% to $964 million from the $1,079 million earned in Q109.

Quarterly revenues from the Americas declined 13% to $2,229 million while those from Europe, the Middle East and Africa (EMEA) declined 11% to $2,550 million. Asia Pacific revenues increased 6% to $603 million.

New bookings for the quarter were $5.53 billion, with consulting bookings of $3.51 billion and outsourcing bookings of $2.02 billion. During the quarter, Accenture experienced a turnaround in financial services. There was also a significant uptick in demand for consulting services. Further, revenue run rates were up sequentially on a per workday basis. The company may have seen the bottom for revenue per network day basis, which should begin to turn positive in the coming quarters. Consulting bookings were at the highest level for the calendar year and were up over 20% in Q110 from Q409. Accenture’s qualified pipeline and outsourcing is the highest it has been in six quarters, and management sees scope to expand existing contracts.

In management consulting, bookings reflected heightened client interest in projects focused on risk management, strategic sourcing, and global expansion activities, and cost takeout remains a priority. In technology consulting, bookings grew as clients sought to consolidate data centers, virtualize their infrastructures, and address cyber security. Systems integration bookings were strong across the spectrum of services including ERP add-ons and extensions and small and medium-sized custom built.

Outsourcing bookings were lower than expected in the quarter, as clients were cautious about signing large multi-year contracts. While the number of signings was up, deals continued to decrease in size, be tighter in scope, and have a higher proportion of services to be performed by the company’s global delivery network.

As a part of its growth strategy, Accenture is driving new technology and industry offerings in the market that have been met with acceptance. The company is also looking to expand geographically, especially in key emerging markets across the world. It is also preparing to enter additional promising markets. Accenture has formed alliances with technology leaders to attract new clients and deepen relationships with existing ones.

Accenture launched new programs in marketing transformation, risk management sustainability, and infrastructure development to leverage its industry depth and differentiation. In digital marketing, Accenture Interactive Business and the Accenture Intelligent Digital Platform are seeing great traction. The company is a leader in innovative smart grid technology, an area which has global momentum and has presented Accenture with new opportunities to take advantage of advanced technologies in other key industries it serves.

Accenture expects Q210 net revenues to be in the range of $5.1 billion to $5.3 billion. For the full year 2010, the company continues to project new bookings in the range of $23 billion to $26 billion, EPS in the range of $2.67 to $2.75, and operating margin of 13.4%.

While the situation seems to be stabilizing, with early signs of recovery in certain industries and markets, I still see a plenty of uncertainty in the economy. There are signs of increases in technology spending, and companies are getting small to medium-sized projects in supply chain strategies, rationalization, risk mitigation, and so forth. But the billion-dollar transformational projects are still far off. Until we see some of these big projects coming through, we are not out of the woods. Nonetheless, I am happy to see companies from diverse sectors of the technology industry giving a positive outlook.