Highlights From Accenture's (ACN) Q3 Conference Call: Guides Higher for FY09

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June 26, 2009 11:42 AM EDT

Last night, Accenture (NYSE: ACN) reported Q3 EPS of $0.68, 4 cents better than the analyst estimate of $0.64. Revenue for the quarter was $5.54 billion, versus the consensus of $5.20 billion. Shares are trading up almost 4% today.

Highlights From ACN's Q3 Conference Call:

Sees Q4 revs of $5-$5.2 billion, versus the consensus of $5.26 billion
Sees FY09 sales unchanged to slightly positive and EPS from $2.60-$2.67 to $2.67-$2.70, versus the consensus of $2.64.
(CEO) While our revenues declined, they were within our expected range. And the disciplined management of our business enabled us to expand operating margin and deliver solid profitability and strong cash flow.
Revenues were 5.15 billion within our guided range of 5.1 to 5.3 billion. We expanded operating margin 14.2%, even with lower revenue production, which is a real accomplishment in this environment.
We delivered earnings per share of $0.68. We delivered new bookings of 6.6 billion, with consulting and outsourcing bookings each exceeding 3 billion.
Finally, we generated free cash flow of 971 million, raised our free cash flow outlook for the full fiscal year, and continue to have a very strong balance sheet with no debt.
(CFO) In management consulting, the demand we experienced was driven by our clients' focus on cost reduction and operational improvement projects, notably in supply chain optimization.
In systems integration, we continue to see a push toward our global delivery network, as clients continue to makes selected investments in ERP and CRM applications.
In outsourcing as well, clients' needs to reduce costs and improve IT operations drove good bookings in applications outsourcing and infrastructure outsourcing.
As we look ahead at the outsourcing revenue we have under contract, both Financial Services and to a lesser extent resources, have experienced a year-over-year decline as a result of lower new bookings and higher contract restructurings and cancellations.
Net revenues for the third quarter were $5.15 billion, a decrease of 16% in U.S. dollars, and a decrease of 4% in local currency from the same period last year.
Consulting revenues were 3 billion, a decrease of 20% in U.S. dollar and 9% in local currency. Outsourcing revenues were 2.2 billion, a decrease of 9% in U.S. dollars and an increase of 3% in local currency.
Moving down the income statement, gross margin was 32.5%, compared with 31.5% for the same period last year, reflecting a 100 basis point improvement.
SG&A costs for the third quarter were $935 million or 18.2% of revenues, compared with 1.1 billion or 17.3% of revenues for the third quarter last year, an increase of 90 basis points.
Operating income was $732 million, reflecting a 14.2% operating margin. This compares with 862 million or 14.1% operating margin in the third quarter last year, an expansion of 10 basis points.
Our total cash balance at May 31 was $4 billion, compared with 3.6 billion at August 31. The 4 billion also reflects the $177 million in negative foreign exchange translation on the cash balances we hold around the world.
In Q3, our utilization was 83%, consistent with Q2, and attrition, which excludes involuntary terminations, dropped from 9% to 8% sequentially, and from 16% in the third quarter last fiscal year.
In Q4, we are unlocking the remaining 19 million founder shares. There are 157 million founder shares still outstanding. Approximately, 120 million or 76% of those are SCA shares, which are redeemable through Accenture.
(CEO) We are not only playing good defense. We are playing offense. The economic environment will improve in certain countries, in specific industries, and with individual offerings we will begin to see momentum.
We are increasing our efforts and focus on geographic expansion. I have been in China and Latin America in the last month, where we continued to grow in a dramatic and profitable way regardless of the economy.
(CFO) We continue to expect new bookings for the fiscal year to land in the range of 23 to $25 billion.
We continue to expect operating margin for the full year to be in the range of 13.4 to 13.7%. We expect that it is more likely to be at the lower end of the range, which would represent a minimum expansion of 50 basis points over last fiscal year.
We now expect our annual effective tax rate to be in the range of 27 to 29% for fiscal 2009 based on activity to-date.
(Q&A) Couple of questions. First one on the pace of converting bookings into revenue for both the consulting and the outsourcing business. So if you can talk about changes that you're observing there, because the bookings obviously have held in pretty well over the last couple of quarters despite the environment. But revenues seem to be trending kind of near the low end of your guidance range here in the back half of the fiscal year. So could you talk about dynamic of how bookings are - last quarter you talked a lot about how getting pipeline into bookings and into revenue was somewhat of a challenge. Now the bookings seem to kind of be there, but can you talk about getting bookings into
revenue? (A) The real issue that or the situation we're dealing with is a major shift from outsourcing, excuse me, from consulting to outsourcing. And so, as we see the bookings come in, certainly, in this quarter and last quarter in the outsourcing business, it's going to take a little while to convert those
to revenue. And I haven't seen any difference in terms of the velocity of opportunities coming through our pipeline this quarter. I do believe though that we're seeing a shift primarily, in both resources and products from consulting to outsourcing, and that's impacting what you're asking about. (A) I'll just add one statistic for you. When we compare bookings, this is for outsourcing, when we compare bookings in Q3 this year to last year, there is about a 7% difference of bookings that are for revenues that are for
future years, meaning for this year beyond fiscal 2010.
The gross margin, I think was at the highest levels you guys have seen in probably close to three years, and I know you've talked about some improved outsourcing contract profitability there as a key driver. So does this mean that as the outsourcing contract portfolio matures further, then gross margins could potentially expand from these May quarter levels, or are there other factors at work that we need to consider, as we think about kind of the medium-term gross margin profile of the company? (A) Well, I think that the thing to point out here is that the outsourcing guys have been on a journey to really industrialize their delivery. And as you know, all year long, this has been coming through very strong.
So I certainly do expect it to continue. But there is always a mix in the portfolio in terms of early deals and later cycle deals. And so, there will be some fluctuation at times. But I think in terms of a trend, this industrialization is here to stay and we expect it to continue to yield for us.
So a question about the health of the consulting business. Has your predictability improved versus three months ago and also importantly, would you say that demand in your consulting business has stabilized on a seasonally adjusted basis? And what I mean by stabilization is not whether it's dropping at a less rapid rate, but whether it's able to now hold ground on an absolute basis, as you kind of look at the next couple of quarters? (A)Well, I'd say that we're going to need one more quarter to be able to make the call on that. Consulting held up very well, even through last quarter, right. And it took a dip this quarter. And I think that we're probably going to need another quarter to read the tea leaves. If you look at what's in that family of stuff, we see a lot more stability in the system integration portion of the business than we see in the sort of pure consulting portion of the business. And last quarter it was almost the reverse. So we're just looking at the dynamics of what's going on there and trying to decide, are they trends or just quarterly anomalies. But at the end of the day, we feel good. And I think, Pam mentioned in some of her remarks that the SI piece of that business, which of course is a big piece, had shown some stability. But the higher end, the higher up the stack work in the last quarter showed more weakness. And so, right now, we have a portfolio approach to the thing and I think we're going need another quarter to answer your question with conviction.