Accenture Earnings Preview: Revenue Growth In Focus

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Accenture

Accenture (NYSE:ACN) is set to announce its Q1 FY2015 results on December 18th. (Fiscal year end in August.) In the previous quarter, the company delivered strong growth for its outsourcing business, which has outpaced the industry, and the consulting division. The company reported 8% year-over-year growth in revenues to $7.8 billion (in local currency). 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 Q1 and FY15

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In its outlook for Q1 2015, Accenture expects revenues to range from $7.55-$7.80 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.

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 $4.4 billion worth of new contracts in Q4 2014, and the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, was at 1.2x during the quarter. We expect this trend to continue in Q1, and Accenture to report mid-single-digit growth in both revenues and the order book. We also expect the book-to-bill ratio for the company will improve and stabilize at 1.3 in Q1 as the company signs more outsourcing contracts.

Consulting Revenues To Remain Tepid

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 in FY14 as revenues have been flat or declining due to two primary factors. First, the business environment remains challenging as clients continue to shy away from discretionary IT spending. Second, Accenture continues to book long-term contracts, which take longer to convert to revenue. Furthermore, pricing pressure continues to suppress the growth in consulting. While this division did report 4% growth in revenues in Q4, we seek clarity on the underlying revenue trend for the company in this earnings announcement. Poor economic data, particularly from China and Europe, continue to temper global business sentiment. This, in conjunction with low consulting orderbooking Q4, will suppress growth from consulting during the quarter. Therefore, we expect the company to report tepid growth in consulting revenues.

Order Booking Under Scanner

During Q4, order bookings were below expectation at $8.3 billion. Accenture has guided that it will book orders worth $33-36 billion in 2015. This translates into new signings worth $8.25-9 billion in each quarter. However, based on past trends, when Q1 has been the weakest quarter in terms of order booking, we expect that the company can book orders worth $8.4 billion in Q1 at the higher end. However, the order book for the company can be in higher as adoption of digital technologies, especially in the digital marketing domain, remains strong. We expect the company to make up for the shortfall in order signings in the ensuing quarters.

New Business Verticals To Report 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. 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 7% below its current market price.

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