Accenture Earnings: Revenue Growth Across Divisions But Order Booking Slows

Accenture (NYSE:ACN) reported its Q4 FY 2014 results on September 24, and the results exceeded market expectations as the company posted nearly 8% year-over-year growth in revenues to $7.8 billion (in local currency). This was above the company’s guided range of $7.45 billion to $7.7 billion. In our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the third quarter. Furthermore, we also expected consulting revenues to register growth, albeit at a slower pace. The results were in line with our expectations, as outsourcing revenue grew 13% year over year in constant currency to $3.8 billion, while the consulting business revenues grew 4% year over year to $4 billion. As expected, the company reported a strong order pipeline for outsourcing, while its consulting order book increased mildly. The company booked new orders worth $8.3 billion in Q4 FY14. ^[1]

See our full analysis for Accenture

Guidance For Q1 and FY15

In its outlook for Q1 2014, Accenture expects revenues to range from $7.55-7.8 billion. For fiscal year 2015, Accenture expects net revenue growth to be in the 4-5% range and GAAP operating profit margins (OPM) to be in 14.4-14.6% range. Furthermore, the company expects its diluted EPS to be $4.74-4.88 range. However, the company expects new bookings for fiscal 2015 in the $34-36 billion range, which is similar to the FY2014 order book.

Revenue Growth Continues At Outsourcing Division

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 13% to $3.8 billion. Additionally, Accenture continued to report strong demand for its outsourcing services with new bookings at $4.4 billion. However, the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, was stagnant at 1.2. Considering this strong order pipeline, we expect that outsourcing will continue to deliver growth in Q1 as well.

Consulting Revenues Post Growth

Management and technology consulting are important drivers for Accenture’s value and account for around 45% of our price estimate combined. The company reported 4% year-over-year growth in revenues to $4 billion. However, the company’s momentum for new orders declined as it booked orders worth $3.9 billion during the quarter. As a result, the book-to-bill ratio, the key metric that ascertains the growth in new contracts, declined to 1. This does not bode well for growth in future revenues of the company as it can only book revenues against orders booked. Pressure on pricing reduced during the quarter, which led to the growth in consulting revenues.

Margins Decline Due To High Employee Costs

Accenture’s gross margins declined by over 150 basis points to 31.7% in Q4, primarily due to an increase in its cost of services, which includes compensation, subcontractor and other personnel costs, and non-payroll outsourcing costs. Two key indicators to this metrics are the utilization rate (number of employees billable to total number of employees) and attrition rate (employees that leave the company). Although the utilization rate was stable at 88%, the attrition rate increased to 15% during the quarter. Considering that the company plans to increase its OPM in 2015, it will have to closely monitor its employee costs as well as SG&A expenses, which declined in Q4 FY14.

We are in the process of updating our model. At present, we have a $76 price estimate for Accenture, which is slightly below its current market price.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Accenture’s 8-k, September 24 2014, www.sec.gov [↩]