Strong Outsourcing Demand Drives Accenture’s Results

Accenture (NYSE:ACN) reported its Q4 FY 2013 results on September 26. The company delivered better than expected revenue growth for the quarter. It reported 4% y-o-y growth in revenues to $7.1 billion. Accenture’s operating margin increased marginally to 13.9% compared to 13.7% at the same time last year,leading to operating income of $983 million. The company also reported higher diluted earnings per share to $1.01. For the full fiscal year 2013, revenues increased 4% in local currency to $28.6 billion. Diluted earnings per share were $4.93, including benefits of $0.72 per share from reductions in reorganization liabilities and final determinations of prior-year tax liabilities.

In our article published earlier, we stated that we expected outsourcing revenues to grow in the fourth quarter. We also expected consulting revenues to remain flat. The company result was in line with our expectation as the outsourcing revenue increased by 6% y-o-y to $3.3 billion while the consulting business revenues were flat at $3.8 billion. However, Accenture reported a strong order pipeline with $8.4 billion new booking in Q4 FY13. ((Accenture’s 8-K , September 26 2013, www.sec.gov))

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Guidance For FY 2014

Accenture expects net revenues for fiscal 2014 to grow in 2% to 6% range and diluted EPS to be in the $4.42 to $4.54 range. However, Accenture expects GAAP operating profit margins to improve to 14.3% to 14.5% range for FY14. Additionally, Accenture is targeting new bookings for fiscal 2014 in the range of $32 billion to $35 billion. In the outlook for Q1 2014, Accenture expects revenues to range from $7 – $7.3 billion.

Outsourcing Continues To Shine

The outsourcing division accounts for 40% of Accenture’s estimated value. This division delivered yet another quarter of strong earnings growth as revenues increased by 6% y-o-y to $3.28 billion. Additionally, Accenture reported strong demand for its outsourcing services and new bookings were well above its expectations. The company booked $4.6 billion worth of fresh contracts in Q4 and the book-to-bill ratio improved to 1.4 during the quarter. The company booked $17 billion worth of new contracts in FY 2013. We expect that outsourcing revenues will continue to deliver mid-to-high single-digit growth in revenues in 2014, as many of its clients across the globe are focusing on improving their competitiveness and productivity.

Low IT Spending Continues To Weigh On Consulting

Management and technology consulting are important drivers for Accenture’s value and account for around 46% of our price estimate combined. Accenture reported that marco environment in consulting continues to be challenging. Its clients continued to cut back on discretionary IT spending, delayed deals and signed fewer contracts for most of the fiscal year. However, the company stated that there are some pockets of growth that will help in driving its order pipeline in the near future.

During the quarter, the company booked $3.8 billion in new orders for the consulting business. The book-to-bill ratio, a key metric that ascertains the growth in new contracts, continued to remain weak at 1. However, conversion from booking to revenues increased marginally in the quarter. Considering that Accenture booked $16.3 billion worth of new contracts in FY2013, we expect the company to report low single-digit growth in revenues for 2014. However, if IT spending were to improve and the company manages to improve its order pipeline, we can expect the company to post mid single-digit growth.

We currently have a $74 Trefis Price Estimate for Accenture, which is slightly below its current market price.

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