Accenture Leans On Outsourcing As Its Consulting Business Recovers

With Accenture (NYSE:ACN) reporting earnings in the coming weeks, we look at the key drivers to its recent results. In the last quarter, Accenture showed 5% y-o-y growth driven by double-digit growth in its outsourcing business. However, the revenue from the consulting division that includes technology and management consulting saw a decline. The consulting business reported revenues of $3.96 billion for Q1 2013, implying a 3% decline annually. Management and technology consulting are important drivers for Accenture’s value and account for around 46% of our price estimate combined, and as these recover, we expect it to contribute meaningfully to the company’s growth.

We expect the consulting business to continue to decline this quarter only to pick up in the second half of the year as revenue from recent contracts start contributing. We also expect Accenture to continue to deliver revenue growth due to strong order pipeline in outsourcing and consulting.

See our full analysis on Accenture

Change In Conversion Rate Consolidates Consulting Revenue

Accenture continued to build a healthy pipeline of consulting contracts in Q1 2013 at $4.2 billion. Most of these contracts are long term ones, which augurs well for the company as they help stabilize revenue and will help Accenture offset the decline in short term and medium term contracts.

Accenture expects bookings from the previous quarters to convert into revenues in the second part of the fiscal year, but the imbalance in contract ‘types’, has led to a visible decline in quarterly consulting revenue as the pipeline for faster converting medium-term and short-term contract is low. Accenture reported a book to bill ratio of 1.1, which means that current bookings were higher than revenue from previous bookings. ^[1] We expect that revenue from consulting will match our projected growth for consulting in FY13, as the company will book revenue against outstanding contracts in second half of FY13.

Outsourcing Continues To Deliver Growth

Consistent double-digit growth in the outsourcing business in the past year has helped the company manage the downturn in Europe. Accenture expects outsourcing to be a primary driver for growth in Q2. The company booked $3.3 billion worth of fresh contracts in Q1 2013, and going forward, we expect that outsourcing revenues will continue to deliver growth. Accenture has launched new business ventures in analytics, digital marketing and mobility that will also complement the company to grow in 2013.

In the outlook for Q2 2013, Accenture expects revenues to range from $6.9 – $7.15 billion. The company expects bookings for 2013 to be in the range of $31-$34 billion and raised EPS to fall between $4.24 – $4.32 for FY13.

We currently have a $70 Trefis Price Estimate for Accenture, which is 10% below its current market price.

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1. Quarterly Earnings Accenture, December 19 2012, www.seeekingalpha.com [↩]