Accenture Earnings Preview: Will Revenue And Orderbook Growth Continue?

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Accenture

Accenture (NYSE:ACN) is set to announce its Q2 FY2015 results on March 26th (Fiscal years 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 7% year-over-year growth in revenues to $7.9 billion, above its guided range. Adjusting for currency effects, the rate of growth was 10%.  However, the point of concern was lower than expected order bookings across both consulting and outsourcing. In this earnings announcement, 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,  which is underperforming the global economy. Apart from the growth in order backlog, we continue to monitor growth in revenue from the outsourcing division and the consulting division, as it will help us in understanding the growth in revenue from existing order pipeline.

See our full analysis on 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 the full fiscal year 2015, Accenture has raised its net revenue growth guidance  to the 5%-8% range and the GAAP operating profit margin guidance to the 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 bookings level.

Outsourcing Revenues To Grow

According to our estimates, the outsourcing division contributes approximately 47% to Accenture’s value. Accenture’s outsourcing division has outpaced the industry and clocked over 10% year-over-year growth in recent quarters. However, Accenture reported tepid demand for its outsourcing services with new bookings at $3.8 billion in the previous quarter, and 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. This does not bode well for growth in future revenues of the company as it can only book revenues against orders booked. While we expect that new signings picked up during the quarter, the guidance indicates that the book to bill ratio will be at 1.2x, indicating that the company signings will continue to outpace revenue recorded from older contracts, as estimated in the driver below.

Consulting Revenues To Remain Tepid

Consulting is an important driver for Accenture’s value and account for around 44% of our price estimate combined. While this division failed to deliver growth for most of the FY2014, it did report 7% year-over-year growth in revenues to $4.09 billion in Q1 FY15 as consulting business activity improved in Europe. However, we believe that new order signings and revenues were under pressure in Q2 due to three 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. Third, pricing pressure continues to suppress the growth in consulting. Additionally, poor economic data, particularly from China and Europe, continue to temper global business sentiment, which makes us believe that consulting order-book will continue to grow at a slower pace. This will likely suppress growth from consulting during the remainder of the FY2015.

New Business Verticals Under Scanner

Accenture continues to focus its vertical industry practice groups on the needs of its clients in emerging areas such as social media, mobility, analytics and cloud (SMAC). Accenture has successfully built its portfolio across both digital marketing and SMAC capability. According to Gartner, Accenture is a leader in its magic quadrant for digital marketing services. Accenture also leads in other areas such as cloud deployment and analytics. Addressing client 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 $77.77 Trefis price estimate for Accenture, which is 15% below its current market price.

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