Accenture Earnings: Revenue Soars Even As Order Booking Disappoints

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Accenture

Accenture (NYSE:ACN) reported its Q1 FY 2015 results on December 18te, and the results exceeded market expectations as the company posted nearly 10% year-over-year growth in revenues to $7.9 billion (in local currency). This was above the company’s guided range of $7.55 billion to $7.80 billion. In our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the first 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 14% year over year in constant currency to $3.80 billion, while the consulting business revenues grew 7% year over year to $4.09 billion. These are the highest growth rates in over two years in both consulting and outsourcing. However, the point of concern was lower than expected order bookings across both consulting and outsourcing. While the company had announced earlier that they were expecting lighter booking in Q1, but the subpar  $7.7 billion order booked in the quarter (compared to $8.7 billion in Q1 FY2014) puts added pressure on Accenture’s existing order pipeline that needs to be bolstered with higher value in the ensuing quarters. The company reported a strong order pipeline for consulting at $3.9 billion, while its outsourcing order book, at $3.8 billion, disappointed. [1]

See our full analysis for Accenture

Guidance For Q2 and FY15

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In its outlook for Q2 FY2015, Accenture expects revenues to range from $7.25-$7.5 billion. For fiscal year 2015, Accenture has raised its net revenue growth for FY 2015 to 5%-8% range and GAAP operating profit margins (OPM) to be in 14.4%-14.6% range. However, it now assumes a foreign-exchange impact of negative 5% compared with fiscal 2014. Furthermore, the company expects its diluted EPS to be $4.74-$4.88 range. The company continues to target new bookings for fiscal 2015 in the range of $34 billion to $36 billion, which is similar to the FY2014 order book.

Revenue Growth Continues At Outsourcing Division But New Orders Disappoint

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 14% to $3.8 billion (In local/constant currency).The book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, declined to 1.0x during the quarter. Accenture reported tepid demand for its outsourcing services with new bookings at $3.8 billion. This does not bode well for growth in future revenues of the company as it can only book revenues against orders booked. However, it said that it see positive trends in overall pipeline and was well positioned to deliver a higher level of bookings in the second quarter. Considering strong order pipeline in the previous quarters, we expect that outsourcing will continue to deliver growth in Q2. However, any further weakness in order booking can hamper its ability to report growth in the coming years.

Consulting Revenues Post Growth Backed By Expansion Of Order Pipeline

Management and technology consulting are important drivers for Accenture’s value and account for around 45% of our price estimate combined. The company reported 7% year-over-year growth in revenues to $4.09 billion. Furthermore, the company’s momentum for new orders increased as it booked orders worth $3.9 billion during the quarter. Since the company reported record revenues, the book-to-bill ratio, the key metric that ascertains the growth in new contracts, declined marginally to 0.9. One of the key announcements during earnings discussion was the change in consulting business sentiment in Europe, which contributes nearly 40% to its revenues. Accenture’s European consulting brightened as clients are now starting to re-invest in consulting. This bodes well for Accenture’s future revenue from consulting.

We are in the process of updating our model. At present, we have a $76 price estimate for Accenture, which is 15% below its current market price.

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Notes:
  1. Accenture’s 8-k, December 18 2014, www.sec.gov []