Accenture Earnings Preview: Will Consulting Revenue Grow In Q3?
Accenture (NYSE:ACN) is set to announce its Q3 FY2014 results on June 26. In the previous quarter, the company delivered strong growth for its outsourcing division which has outpaced the industry. The company reported 1% year-over-year growth in U.S. dollar terms to $7.1 billion. However, soft global demand for consulting services plagued its consulting business as revenues were flat. In this earnings announcement, apart from the growth in outsourcing division, we will closely monitor revenue from the consulting division, as it is critical for Accenture’s future growth. Additionally, we will continue to observe the consulting order pipeline as it will give us a fair indication of whether global consulting demand is on the mend.
See our full analysis on Accenture
Guidance For Q3 and FY14
In its 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 the 3 – 6% range (with a midpoint of $29.9 billion) and GAAP operating profit margins to be in 14.3% – 14.5% range. It expects a mild improvement in diluted EPS, in the $4.50 – 4.62 range. The company has also increased its guidance for new bookings for fiscal 2014 to $33 – 36 billion range.
Consulting Revenues Under The Lens
Management and technology consulting are important drivers for Accenture’s value and account for around 45% of our price estimate combined. This division has failed to deliver growth, as revenues have been flat or declining due to two primary factors. Firstly, the business environment remains challenging as clients continue to shy away from discretionary IT spending. Secondly, Accenture continues to book long-term contracts, which take longer to convert to revenue. However, prospects for this division are improving as more companies are looking to improve their efficiency to increase production. While the revenues for the divisions were flat at $3.69 billion in Q2, the company reported momentum in new orders that might help the company to post low single-digit growth in Q3, according to its guidance. In this earnings announcement, we will closely monitor the growth in its consulting revenues. Furthermore, we expect the company to report a strong build up in its consulting pipeline, which should help the company post growth in revenue in the coming years.
Outsourcing Revenues To Grow
According to our estimates, the outsourcing division contributes approximately 43% to Accenture’s value. Accenture’s outsourcing division has outpaced the industry and clocked nearly 5% year-over-year growth in recent quarters. The company also booked $5.5 billion worth of fresh contracts in Q2 2014, and the book-to-bill ratio was at 1.6 during the quarter. We expect this trend to continue in Q3, and Accenture to report mid-single-digit growth in revenues and order book. We also anticipate the book-to-bill ratio for the company to stabilize at 1.4 in Q3.
New Business Verticals To Deliver Growth
Accenture continues to focus its vertical industry practice groups on the needs of its clients in emerging areas such as analytics, digital marketing, cloud and mobility, computing and communications. Satisfying these needs will not only bolster its growth in the coming quarters, it will focus its client relationships on the highest-value, most profitable parts of the business. The company’s goal is to enhance its client engagements by operating as much as possible at the strategic, C-level echelon, where it can make both the biggest difference and the most money. In this earnings announcement, we will be closely monitoring the release and commentary for the impact of these efforts in driving Accenture’s overall revenues and margins.
We currently have a $76 Trefis price estimate for Accenture, which is slightly below its current market price
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