Accenture Earnings Preview: Challenging Business Environment Would Continue To Temper Revenue Growth

Accenture (NYSE:ACN) is set to announce its Q4 FY2014 results on September 24th. (Fiscal years end in August.) In the previous quarter, the company delivered strong growth for its outsourcing, which has outpaced the industry, and consulting division. The company reported 7% year-over-year growth in revenues to $7.74 billion. 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. Furthermore, we will continue to observe the growth in order pipeline as it will help us in ascertaining the affects of economic headwinds, especially from Europe that is underperforming the global economy.

See our full analysis on Accenture

Guidance For Q4 and FY14

In its outlook for Q4 2014, Accenture expects revenues to range from $7.45 – $7.7 billion. For fiscal year 2014, Accenture now expects net revenue growth to be in the 4 – 5% range and GAAP operating profit margins to 14.3%.   However, it revised its diluted EPS guidance down to $4.50 – $4.54. The company expects 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. Furthermore, pricing pressure continues to suppress the growth in consulting. We expect this trend to continue in Q4, which will suppress growth from consulting. Poor economic data, particularly from China and Europe, continue to temper global business sentiment. Therefore, we expect the company to report a slowdown in consulting order in Q4.

Outsourcing Revenues To Grow

According to our estimates, the outsourcing division contributes approximately 43.7% to Accenture’s value. Accenture’s outsourcing division has outpaced the industry and clocked over 7% year-over-year growth in recent quarters. The company also booked $4.5 billion worth of new contracts in Q3 2014, and the book-to-bill ratio was at 1.2 during the quarter. We expect this trend to continue in Q4, 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 Q4.

Growth In New Business Verticals In Focus

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. Addressing client’s needs in these verticals will not only bolster Accenture’s growth in the coming years, but also help it in positioning itself on the highest-value, most profitable parts of the client’ s 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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