It was only a matter of time before tangible signs became visible that Accenture's (NYSE:ACN) business would see fallout from the credit crunch and subsequent hit to global growth prospects. Yet ACN's cash flow generation remains strong and management just signaled its confidence that the future remains bright.
IN PICTURES: 8 Tips For Starting Your Own Business
Fourth-Quarter Income
Accenture's fourth-quarter net revenues fell 14% to $5.15 billion. However, the top line fell only 7% in local currencies. With regard to the two primary operating segments, the decline in consulting revenue (56.5% of total quarterly revenue) was the most severe, falling 12% in local currency on lower engagements in management consulting, systems integration work, and information technology and related technology consulting services. Outsourcing accounted for the balance of quarterly revenue and is where clients let Accenture help run software applications like SAP (NYSE:SAP) and other functions, such as finance, accounting and human resource activities. This segment actually posted 1% revenue growth in local currencies.
Accenture was able to reign in the cost of its services, but higher sales and marketing costs, a hefty restructuring charge to furlough employees and respond to the slowing of its businesses served to send diluted earnings down 41.7% to 39 cents per share. Excluding the charge, earnings would have been 63 cents, which matched analyst expectations.
Competition
IBM (NYSE:IBM) and Hewlett Packard (NYSE:HPQ) also run sizable consulting and business outsourcing units. IBM's global service revenue fell 4% in local currency during its most recent quarter as consulting and systems integration sales fell 7%. Service revenue at HP catapulted 93%, due mainly to the recent acquisition of EDS. M&A activity for technology and business service firms remains brisk, with buyouts of Perot Systems (NYSE:PER) and Affiliated Computer Services (NYSE:ACS) in recent days.
Outlook
Accenture expects diluted earnings between $2.64 and $2.72 for the coming year, as net revenue could either grow or decline slightly. Free cash flow should come in slightly above reported earnings, in the range of $2.1 billion to $2.3 billion. (Read more about analyzing free cash flow in Analyze Cash Flow The Easy Way.)
Bottom Line
The firm's free cash flow guidance demonstrates that its service business model throws off plenty of excess capital. So much that management felt comfortable enough to raise its annual dividend 50% to 75 cents per share. Going forward the company will pay a semi-annual dividend, instead of on an annual basis. This will place the dividend yield close to 2%.
The weaker sales and profit trends served to send the stock down slightly after Thursday's after market financial results release. This could be a buying opportunity and the shares are already reasonably valued at under 13-times forward free cash flow estimates. Despite the more tepid outlook, Accenture's business model remains fully intact and will only benefit during the next uptick in global activity. Recent buyouts of smaller rivals serve to demonstrate the appeal and lucrative nature of Accenture's operations.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
