Accenture Earnings: Consulting Revenues Disappoint, Even As Order Book Improves

Accenture (NYSE:ACN) reported its Q2 FY 2014 results on March 27th. The company results were tepid as revenues grew marginally by 1% in U.S. dollar terms to $7.13 billion. However, the company’s outlook on the consulting business failed to enthuse the markets, and Accenture’s stock opened 5% below the prior close.

In our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the second quarter. We also expected consulting revenues to remain flat in constant currency terms. The company result was in line with our expectation as the outsourcing revenue grew 5% year over year in constant currency to $3.43 billion, while the consulting business revenues were flat at $3.69 billion. Furthermore, as per our expectations, the company reported a strong order pipeline, and booked new orders worth $10.1 billion in Q2 FY14. ^[1]

See our full analysis on Accenture

Guidance For Q3 and FY14

In the outlook for Q3 2014, Accenture expects revenues to range from $7.40 – $7.65 billion. For fiscal year 2014, Accenture expects net revenue growth to be in 3% to 6% range (with a midpoint of $29.90 billion) and GAAP operating profit margins to be in 14.3% to 14.5% range. However, it expects a mild improvement in diluted EPS, which will now be in the $4.50 to $4.62 range. The company has also increased its guidance for new bookings for fiscal 2014 to $33 billion- $36 billion range.

Outsourcing Shines Once Again

According to our estimates, the outsourcing division contributes approximately 43% to Accenture’s value. This division continued to outpace the outsourcing industry as revenues grew by 5% to $3.43 billion. Additionally, Accenture continued to report strong demand for its outsourcing services with record new bookings at $5.5 billion. Additionally, the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, grew by 30 basis points sequentially to 1.6. Considering this strong order pipeline, we expect that outsourcing will continue to deliver growth in Q3 as well.

Consulting Revenues Remain Tepid

Management and technology consulting are important drivers for Accenture’s value and account for around 45% of our price estimate combined. While the revenues for the divisions were flat at $3.69 billion, the company reported momentum in new order that might help the company to post low single-digit growth in Q3, according to its guidance. During the quarter, the company booked $4.6 billion in new orders for the consulting business, which is record booking for a quarter. The book-to-bill ratio, the key metric that ascertains the growth in new contracts improved to 1.2. However, pricing pressure suppressed growth in consulting revenues even though the company delivered good growth in consulting volumes. We expect this trend to continue in the coming quarters, which will suppress growth from consulting.

We currently have a $76.09 Trefis price estimate for Accenture, which is 3% below its current market price.

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1. Accenture’s 10-Q, March 27 2014, www.sec.gov [↩]